UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterlynine months period ended September 30, 20192020
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________________ to _______________________
Commission File Number:001-36210
LiqTech International, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 20-1431677 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
|
| |
Industriparken 22C, DK 2750 Ballerup, Denmark |
|
|
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: +4544986000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol(s) |
| Name of each exchange on which registered |
Common Stock, $0.001 par value |
| LIQT |
| The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | ☐ | Accelerated filer |
|
Non-accelerated filer |
| Smaller reporting company | ☒ |
Emerging growth company | ☐ |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at November 14, 2019,9, 2020, was 20,547,66821,655,461 shares.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended September 30, 20192020
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties, including but not limited to the risks described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. This is especially underlined by the anticipated impacts from the COVID-19 pandemic on the Company, including the related effects to our business operations, results of operations, cash flows, and financial position, and our future responses to the COVID-19 pandemic. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
PART I - FINANCIAL INFORMATION
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of | As of | |||||||
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Current Assets: | ||||||||
Cash | $ | 9,957,472 | $ | 3,776,111 | ||||
Restricted Cash | 1,678,936 | - | ||||||
Accounts receivable, net | 6,560,857 | 1,308,122 | ||||||
Other receivables | 3,697,315 | 1,098,796 | ||||||
Contract assets | 641,356 | 624,275 | ||||||
Inventories, net | 5,186,234 | 4,432,055 | ||||||
Prepaid expenses | 203,024 | 133,847 | ||||||
Total Current Assets | 27,925,194 | 11,373,206 | ||||||
Long-Term Assets: | ||||||||
Property and Equipment, net | 2,783,420 | 1,431,649 | ||||||
Operating lease right-of-use asset | 2,200,130 | - | ||||||
Construction in progress | 2,138,406 | - | ||||||
Investments at cost | 5,433 | 5,714 | ||||||
Other intangible assets | - | 748 | ||||||
Deposits | 475,769 | 347,932 | ||||||
Goodwill | 605,313 | - | ||||||
Total Long-Term Assets | 8,208,471 | 1,786,043 | ||||||
Total Assets | $ | 36,133,665 | $ | 13,159,249 | ||||
As of | As of | |||||||
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash, cash equivalents and restricted cash | $ | 14,492,549 | $ | 9,783,932 | ||||
Accounts receivable, net of allowance for doubtful accounts of $154,089 and $612,434 at September 30, 2020 and December 31, 2019, respectively | 3,636,765 | 6,272,760 | ||||||
Inventories, net of allowance for excess and obsolete inventory of $765,512 and $665,308 at September 30, 2020 and December 31, 2019, respectively | 5,966,538 | 5,199,238 | ||||||
Contract assets | 3,008,541 | 5,664,929 | ||||||
Prepaid expenses and other current assets | 665,402 | 566,398 | ||||||
Total Current Assets | 27,769,795 | 27,487,257 | ||||||
Long-Term Assets: | ||||||||
Property and Equipment, net of accumulated depreciations of $12,066,768 and $10,815,995 at September 30, 2020 and December 31, 2019, respectively | 6,754,404 | 4,825,952 | ||||||
Operating lease right-of-use assets | 4,817,875 | 5,053,614 | ||||||
Deposits and other assets | 521,649 | 498,053 | ||||||
Intangible assets, net of accumulated depreciations of $229,335 and $141,282 at September 30, 2020 and December 31, 2019, respectively | 456,922 | 488,716 | ||||||
Goodwill | 247,864 | 236,131 | ||||||
Total Long-Term Assets | 12,798,714 | 11,102,466 | ||||||
Total Assets | $ | 40,568,509 | $ | 38,589,723 | ||||
(Continued)
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities and Stockholders’ Equity | As of | As of | ||||||||||||||
September 30, | December 31, | As of | As of | |||||||||||||
2019 | 2018 | September 30, | December 31, | |||||||||||||
(Unaudited) | 2020 | 2019 | ||||||||||||||
(Unaudited) | ||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Current portion of capital lease obligations | $ | - | $ | 13,789 | ||||||||||||
Current maturities of operating lease liabilities | 681,481 | - | ||||||||||||||
Current portion of contingent earn-out | 291,690 | - | ||||||||||||||
Accounts payable | 3,703,850 | 2,122,479 | $ | 1,692,550 | $ | 4,339,070 | ||||||||||
Accrued expenses | 3,623,012 | 1,868,229 | 4,988,842 | 3,222,951 | ||||||||||||
Current portion of finance lease obligations | 37,620 | 34,772 | ||||||||||||||
Current portion of operating lease liabilities | 953,087 | 999,685 | ||||||||||||||
Current portion of contingent earn-out liability | 0 | 299,585 | ||||||||||||||
Contract liabilities | 1,165,684 | 516,335 | 1,427,618 | 1,421,376 | ||||||||||||
Income taxes payable | 31,260 | - | 15,394 | 14,692 | ||||||||||||
Deferred revenue | 842,254 | 98,781 | ||||||||||||||
Total Current Liabilities | 10,339,231 | 4,619,613 | 9,115,111 | 10,332,131 | ||||||||||||
Net deferred income tax liability | 210,393 | - | ||||||||||||||
Contingent earn-out, net of current portion | 583,380 | - | ||||||||||||||
Operating lease liabilities, net of current maturities | 1,561,076 | - | ||||||||||||||
Deferred tax liability | 306,911 | 338,763 | ||||||||||||||
Finance lease obligations, net of current portion | 152,476 | 172,273 | ||||||||||||||
Operating lease liabilities, net of current portion | 4,028,986 | 4,141,855 | ||||||||||||||
Contingent earn-out liability, net of current portion | 0 | 599,170 | ||||||||||||||
Total Long-term Liabilities | 2,354,849 | - | 4,488,373 | 5,252,061 | ||||||||||||
Total Liabilities | 12,694,080 | 4,619,613 | 13,603,484 | 15,584,192 | ||||||||||||
Commitment and Contingencies | - | - | ||||||||||||||
Stockholders' Equity: | ||||||||||||||||
Preferred stock; par value $0.001, 2,500,000 shares authorized; no shares issued or outstanding at September 30, 2019 and December 31, 2018 respectively | - | - | ||||||||||||||
Common stock; par value $0.001, 25,000,000 shares authorized, 20,547,668 and 18,228,887 (each after the 4-to-1 reverse stock split) shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 20,548 | 18,229 | ||||||||||||||
Series A Mandatory Convertible Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at September 30, 2020 and December 31, 2019 | 0 | 0 | ||||||||||||||
Common stock; par value $0.001, 25,000,000 shares authorized, 21,655,461 and 20,547,668 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 21,655 | 20,548 | ||||||||||||||
Additional paid-in capital | 61,483,032 | 46,575,986 | 69,824,156 | 61,398,150 | ||||||||||||
Accumulated deficit | (31,448,837 | ) | (32,286,224 | ) | (38,380,339 | ) | (32,246,608 | ) | ||||||||
Deferred compensation | (23,332 | ) | (23,499 | ) | ||||||||||||
Accumulated other comprehensive loss | (6,591,826 | ) | (5,744,856 | ) | (4,500,447 | ) | (6,166,559 | ) | ||||||||
Total Stockholders' Equity | 23,439,585 | 8,539,636 | 26,965,025 | 23,005,531 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 36,133,665 | $ | 13,159,249 | $ | 40,568,509 | $ | 38,589,723 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Net Sales | $ | 9,672,716 | $ | 3,347,204 | $ | 26,391,100 | $ | 9,336,614 | ||||||||||||||||||||||||
Revenue | $ | 3,543,730 | $ | 9,672,716 | $ | 18,467,057 | $ | 26,391,100 | ||||||||||||||||||||||||
Cost of Goods Sold | 7,444,978 | 3,058,465 | 20,613,172 | 8,447,645 | 3,852,210 | 7,444,978 | 15,641,998 | 20,613,172 | ||||||||||||||||||||||||
Gross Profit | 2,227,738 | 288,739 | 5,777,928 | 888,969 | (308,480 | ) | 2,227,738 | 2,825,059 | 5,777,928 | |||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Selling expenses | 461,010 | 414,504 | 1,458,633 | 1,288,294 | 741,738 | 461,010 | 2,024,485 | 1,458,633 | ||||||||||||||||||||||||
General and administrative expenses | 1,318,505 | 663,547 | 3,057,807 | 2,008,194 | 1,526,327 | 1,353,428 | 4,585,857 | 3,161,855 | ||||||||||||||||||||||||
Research and development expenses | 189,216 | 152,849 | 591,572 | 498,526 | 256,239 | 189,216 | 883,752 | 591,572 | ||||||||||||||||||||||||
Total Operating Expense | 1,968,731 | 1,230,900 | 5,108,012 | 3,795,014 | 2,524,304 | 2,003,654 | 7,494,094 | 5,212,060 | ||||||||||||||||||||||||
Income (Loss) from Operations | 259,007 | (942,161 | ) | 669,916 | (2,906,045 | ) | (2,832,784 | ) | 224,084 | (4,669,035 | ) | 565,868 | ||||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||
Gain on modification of earn-out liability | 301,573 | 0 | 301,573 | 0 | ||||||||||||||||||||||||||||
Interest and other income | 28,736 | 1,814 | 54,186 | 12,271 | 8,164 | 28,736 | 12,901 | 54,186 | ||||||||||||||||||||||||
Interest expense | (35,292 | ) | (5,463 | ) | (110,442 | ) | (65,937 | ) | (41,388 | ) | (369 | ) | (102,926 | ) | (6,394 | ) | ||||||||||||||||
Fair value adjustment of warrants | (664,350 | ) | 0 | (901,250 | ) | 0 | ||||||||||||||||||||||||||
Gain (Loss) on currency transactions | 403,432 | 23,861 | 244,872 | 240,947 | (660,747 | ) | 403,432 | (821,681 | ) | 244,872 | ||||||||||||||||||||||
Gain (Loss) on sale of fixed assets | 474 | - | (21,145 | ) | - | 0 | 474 | 0 | (21,145 | ) | ||||||||||||||||||||||
Total Other Income (Expense) | 397,350 | 20,212 | 167,471 | 187,281 | (1,056,748 | ) | 432,273 |
| (1,511,383 | ) | 271,519 | |||||||||||||||||||||
Income (Loss) Before Income Taxes | 656,357 | (921,949 | ) | 837,387 | (2,718,764 | ) | ||||||||||||||||||||||||||
Income (Loss) Before Income Taxes | (3,889,532 | ) | 656,357 | (6,180,418 | ) | 837,387 | ||||||||||||||||||||||||||
Income Tax Expense (Income) | - | - | - | - | ||||||||||||||||||||||||||||
Income Tax Provision (Benefit) | (16,113 | ) | 0 | (46,687 | ) | 0 | ||||||||||||||||||||||||||
Net Income (Loss) | $ | 656,357 | $ | (921,949 | ) | $ | 837,387 | $ | (2,718,764 | ) | ||||||||||||||||||||||
Net Income (Loss) | $ | (3,873,419 | ) | $ | 656,357 | $ | (6,133,731 | ) | $ | 837,387 | ||||||||||||||||||||||
Basic and Diluted Income (Loss) Per Share | $ | 0.03 | $ | (0.05 | ) | $ | 0.04 | $ | (0.18 | ) | ||||||||||||||||||||||
Basic Income (Loss) Per Share | $ | (0.18 | ) | $ | 0.03 | $ | (0.29 | ) | $ | 0.04 | ||||||||||||||||||||||
Diluted Income (Loss) Per Share | $ | (0.18 | ) | $ | 0.03 | $ | (0.29 | ) | $ | 0.04 | ||||||||||||||||||||||
Basic Weighted Average Common Shares Outstanding | 20,547,667 | 18,185,137 | 19,350,533 | 15,199,809 | 21,653,514 | 20,547,667 | 21,059,251 | 19,350,533 | ||||||||||||||||||||||||
Diluted Weighted Average Common Shares Outstanding | 20,563,540 | 18,185,137 | 19,366,545 | 15,199,809 | 21,653,514 | 20,563,540 | 21,059,251 | 19,366,545 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME / (LOSS)-LOSS (UNAUDITED)
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Net Income (Loss) | 656,357 | (921,949 | ) | 837,387 | (2,718,764 | ) | (3,873,419 | ) | 656,357 | (6,133,731 | ) | 837,387 | ||||||||||||||||||||
Income (Loss), net of taxes: | ||||||||||||||||||||||||||||||||
Currency Translation | (1,014,265 | ) | (63,279 | ) | (846,970 | ) | (521,839 | ) | ||||||||||||||||||||||||
Other Comprehensive Income - Currency Translation, Net | 1,422,294 | (1,014,265 | ) | 1,666,112 | (846,970 | ) | ||||||||||||||||||||||||||
Total Comprehensive Loss | $ | (357,908 | ) | $ | (985,228 | ) | $ | (9,583 | ) | $ | (3,240,603 | ) | $ | (2,451,125 | ) | $ | (357,908 | ) | $ | (4,467,619 | ) | $ | (9,583 | ) | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
For the period ended September 30, 20192020 and September 30, 20182019
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Compre- | Deferred | ||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | hensive | Compen- | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Income/(Loss) | sation | |||||||||||||||||||||||||
BALANCE, December 31, 2018 | - | - | 18,228,887 | 18,229 | 46,575,986 | (32,286,224 | ) | (5,744,856 | ) | (23,499 | ) | |||||||||||||||||||||
Stock based compensation expenses recognized for the period ended March 31, 2019 | 5,778 | 10,166 | ||||||||||||||||||||||||||||||
Common shares issued at $4.63 per share for services provided and to be provided by the board of directors | 28,993 | 29 | 134,138 | (21,667 | ) | |||||||||||||||||||||||||||
Exercise of stock options | 45,000 | 45 | 133,155 | |||||||||||||||||||||||||||||
Currency translation, net | (213,922 | ) | ||||||||||||||||||||||||||||||
Net Income for the period ended March 31, 2019 | 34,244 | |||||||||||||||||||||||||||||||
BALANCE, March 31, 2019 | - | - | 18,302,880 | 18,303 | 46,849,057 | (32,251,980 | ) | (5,958,778 | ) | (35,000 | ) | |||||||||||||||||||||
Stock based compensation expenses recognized for the period ended June 30, 2019 | 17,333 | 5,834 | ||||||||||||||||||||||||||||||
Exercise of warrants | 28,887 | 29 | (29 | ) | ||||||||||||||||||||||||||||
Common shares issued for cash at $7.25 per share, net of offering cost of $1,390,262, May 2019 | 2,215,862 | 2,216 | 14,672,522 | |||||||||||||||||||||||||||||
Currency translation, net | 381,217 | |||||||||||||||||||||||||||||||
Net Income for the period ended June 30, 2019 | 146,786 | |||||||||||||||||||||||||||||||
BALANCE, June 30, 2019 | - | - | 20,547,668 | 20,548 | 61,538,883 | (32,105,194 | ) | (5,577,561 | ) | (29,166 | ) | |||||||||||||||||||||
Stock based compensation expenses recognized for the period ended September 30, 2019 | 17,333 | 5,834 | ||||||||||||||||||||||||||||||
Net additional offering cost of $73,184, for capital raise in May 2019 | (73,184 | ) | ||||||||||||||||||||||||||||||
Currency translation, net | (1,014,265 | ) | ||||||||||||||||||||||||||||||
Net Income for the period ended September 30, 2019 | 656,357 | |||||||||||||||||||||||||||||||
BALANCE, September 30, 2019 | - | - | 20,547,668 | 20,548 | 61,483,032 | (31,448,837 | ) | (6,591,826 | ) | (23,332 | ) | |||||||||||||||||||||
BALANCE, December 31, 2017 | 2,200,837 | 2,201 | 11,107,316 | 11,108 | 40,491,229 | (28,471,696 | ) | (5,040,792 | ) | (79,933 | ) | |||||||||||||||||||||
Common shares issued at $4.04 per share for services provided and to be provided by the board of directors | 14,852 | 14 | 59,986 | |||||||||||||||||||||||||||||
Stock based compensation expenses recognized for the period ended March 31, 2018 | 18,273 | |||||||||||||||||||||||||||||||
Currency translation, net | 174,867 | |||||||||||||||||||||||||||||||
Net Loss for the period ended March 31, 2018 | (1,533,287 | ) | ||||||||||||||||||||||||||||||
BALANCE, March 31, 2018 | 2,200,837 | 2,201 | 11,122,168 | 11,123 | 40,551,214 | (30,004,983 | ) | (4,865,925 | ) | (61,660 | ) | |||||||||||||||||||||
Common shares issued for cash at $1.36 per share, net of offering cost of $747,423, April 2018 | 4,862,132 | 4,862 | 5,860,215 | |||||||||||||||||||||||||||||
Conversion of mandatory preferred stock issued in 2017 into 4 common shares per preferred stock | (2,200,837 | ) | (2,201 | ) | 2,200,837 | 2,201 | ||||||||||||||||||||||||||
Stock based compensation expenses recognized for the period ended June 30, 2018 | 9,161 | |||||||||||||||||||||||||||||||
Currency translation, net | (633,427 | ) | ||||||||||||||||||||||||||||||
Net Loss for the period ended June 30, 2018 | (263,526 | ) | ||||||||||||||||||||||||||||||
BALANCE, June 30, 2018 | - | - | 18,185,137 | 18,185 | 46,411,430 | (30,268,509 | ) | (5,499,352 | ) | (52,499 | ) | |||||||||||||||||||||
Stock based compensation expenses recognized for the period ended September 30, 2018 | 5,833 | |||||||||||||||||||||||||||||||
Currency translation, net | (63,279 | ) | ||||||||||||||||||||||||||||||
Net Loss for the period ended September 30, 2018 | (921,949 | ) | ||||||||||||||||||||||||||||||
BALANCE, September 30, 2018 | - | - | 18,185,137 | 18,185 | 46,411,430 | (31,190,458 | ) | (5,562,631 | ) | (46,666 | ) | |||||||||||||||||||||
Accumulated Other | ||||||||||||||||||||||||
Additional | Compre- | |||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | hensive | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income/(Loss) | TOTAL | |||||||||||||||||||
BALANCE, December 31, 2019 | 20,547,668 | 20,548 | 61,398,150 | (32,246,608 | ) | (6,166,559 | ) | 23,005,531 | ||||||||||||||||
Common shares issued in settlement of RSUs for services by the board of directors | 8,212 | 8 | 44,992 | 45,000 | ||||||||||||||||||||
Stock based compensation | 96,222 | 96,222 | ||||||||||||||||||||||
Currency translation, net | (495,959 | ) | (495,959 | ) | ||||||||||||||||||||
Net Income | 303,499 | 303,499 | ||||||||||||||||||||||
BALANCE, March 31, 2020 | 20,555,880 | 20,556 | 61,539,364 | (31,943,109 | ) | (6,662,518 | ) | 22,954,293 | ||||||||||||||||
Common shares issued in settlement of RSUs for services by the board of directors | 8,333 | 8 | (8 | ) | 0 | |||||||||||||||||||
Common shares issued for cash at $5.00 per share, net of offering cost of $680,952, May 2020 | 1,085,000 | 1,085 | 4,742,963 | 4,744,048 | ||||||||||||||||||||
Stock based compensation | 82,335 | 82,335 | ||||||||||||||||||||||
Currency translation, net | 739,777 | 739,777 | ||||||||||||||||||||||
Net Loss | (2,563,811 | ) | (2,563,811 | ) | ||||||||||||||||||||
BALANCE, June 30, 2020 | 21,649,213 | 21,649 | 66,364,654 | (34,506,920 | ) | (5,922,741 | ) | 25,956,642 | ||||||||||||||||
Prefunded warrants, 515,000, transferred to equity upon modification in August 2020 | 3,476,250 | 3,476,250 | ||||||||||||||||||||||
Additional offering cost of $81,923, related to the capital raise in May 2020 | (81,923 | ) | (81,923 | ) | ||||||||||||||||||||
Exercise of stock options | 6,248 | 6 | 18,494 | 18,500 | ||||||||||||||||||||
Stock based compensation | 46,681 | 46,681 | ||||||||||||||||||||||
Currency translation, net | 1,422,294 | 1,422,294 | ||||||||||||||||||||||
Net Loss | (3,873,419 | ) | (3,873,419 | ) | ||||||||||||||||||||
BALANCE, September 30, 2020 | 21,655,461 | 21,655 | 69,824,156 | (38,380,339 | ) | (4,500,447 | ) | 26,965,025 | ||||||||||||||||
BALANCE, December 31, 2018 | 18,228,887 | 18,229 | 46,552,487 | (32,286,224 | ) | (5,744,856 | ) | 8,539,636 | ||||||||||||||||
Common shares issued in settlement of RSUs for services by the board of directors | 28,993 | 29 | 112,471 | 112,500 | ||||||||||||||||||||
Stock based compensation | 15,944 | 15,944 | ||||||||||||||||||||||
Exercise of stock options | 45,000 | 45 | 133,155 | 133,200 | ||||||||||||||||||||
Currency translation, net | (213,922 | ) | (213,922 | ) | ||||||||||||||||||||
Net Income | 34,244 | 34,244 | ||||||||||||||||||||||
BALANCE, March 31, 2019 | 18,302,880 | 18,303 | 46,814,057 | (32,251,980 | ) | (5,958,778 | ) | 8,621,602 | ||||||||||||||||
Stock based compensation | 23,167 | 23,167 | ||||||||||||||||||||||
Exercise of warrants | 28,887 | 29 | (29 | ) | 0 | |||||||||||||||||||
Common shares issued for cash at $7.25 per share, net of offering cost of $1,390,262, May 2019 | 2,215,862 | 2,216 | 14,672,522 | 14,674,738 | ||||||||||||||||||||
Rounding shares in connection with reverse stock split | 39 | |||||||||||||||||||||||
Currency translation, net | 381,217 | 381,217 | ||||||||||||||||||||||
Net Income | 146,786 | 146,786 | ||||||||||||||||||||||
BALANCE, June 30, 2019 | 20,547,668 | 20,548 | 61,509,717 | (32,105,194 | ) | (5,577,561 | ) | 23,847,510 | ||||||||||||||||
Stock based compensation | 23,167 | 23,167 | ||||||||||||||||||||||
Additional offering costs of $73,184, related to the capital raise in May 2019 | (73,184 | ) | (73,184 | ) | ||||||||||||||||||||
Currency translation, net | (1,014,265 | ) | (1,014,265 | ) | ||||||||||||||||||||
Net Income | 656,357 | 656,357 | ||||||||||||||||||||||
BALANCE, September 30, 2019 | 20,547,668 | 20,548 | 61,459,700 | (31,448,837 | ) | (6,591,826 | ) | 23,439,585 | ||||||||||||||||
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine months ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net Income (Loss) | $ | 837,387 | $ | (2,718,764 | ) | $ | (6,133,731 | ) | $ | 837,387 | ||||||
Adjustments to reconcile net loss to net cash provided (used) by operations: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operations: | ||||||||||||||||
Depreciation and amortization | 852,705 | 621,460 | 2,019,147 | 852,705 | ||||||||||||
Stock-based compensation | 174,778 | 93,267 | 270,238 | 174,778 | ||||||||||||
Change in fair value of warrant liability | 901,250 | 0 | ||||||||||||||
Gain on modification of earn-out liability | (301,573 | ) | 0 | |||||||||||||
Change in deferred tax asset / liability | (46,687 | ) | 0 | |||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | (4,652,294 | ) | (1,369,207 | ) | 2,635,995 | (4,652,294 | ) | |||||||||
Other receivables | (2,593,412 | ) | ||||||||||||||
Inventory | (430,776 | ) | 290,567 | (767,300 | ) | (430,776 | ) | |||||||||
Construction in progress | (2,138,406 | ) | - | |||||||||||||
Prepaid expenses and deposits | (104,928 | ) | (47,243 | ) | ||||||||||||
Account payable | 1,481,881 | (301,016 | ) | |||||||||||||
Contract assets | 2,656,388 | (2,610,493 | ) | |||||||||||||
Deposits | 0 | (2,138,406 | ) | |||||||||||||
Prepaid expenses and other current assets | (82,756 | ) | (104,928 | ) | ||||||||||||
Accounts payable | (2,646,520 | ) | 1,481,881 | |||||||||||||
Accrued expenses | 1,769,893 | (326,932 | ) | 1,451,421 | 1,769,893 | |||||||||||
Operating lease liability | (347,747 | ) | - | |||||||||||||
Contract assets and liabilities, net | 632,268 | (80,338 | ) | |||||||||||||
Operating lease liabilities | (565,209 | ) | (347,747 | ) | ||||||||||||
Contract liabilities | 6,242 | 649,349 | ||||||||||||||
Total Adjustments | (5,356,038 | ) | (1,119,442 | ) | 5,530,636 | (5,356,038 | ) | |||||||||
Net Cash Used in Operating Activities | (4,518,651 | ) | (3,838,206 | ) | ||||||||||||
Net Cash (used in) Operating Activities | (603,095 | ) | (4,518,651 | ) | ||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Purchase of property and equipment | (510,403 | ) | (145,984 | ) | (2,904,169 | ) | (510,403 | ) | ||||||||
Proceeds from sale/recovery of property and equipment | 23,700 | - | ||||||||||||||
Purchase of other intangible assets | (23,932 | ) | 23,700 | |||||||||||||
Net cash paid for acquisition | (1,154,902 | ) | - | (301,573 | ) | (1,154,902 | ) | |||||||||
Net Cash Used in Investing Activities | (1,641,605 | ) | (145,984 | ) | ||||||||||||
Net Cash used in Investing Activities | (3,229,674 | ) | (1,641,605 | ) | ||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Net proceeds/payments on capital lease obligation | (13,789 | ) | 48,127 | |||||||||||||
Payments on finance lease obligation | (26,120 | ) | (13,789 | ) | ||||||||||||
Proceeds from exercise of stock options | 133,200 | - | 18,500 | 133,200 | ||||||||||||
Proceeds from issuance of common stocks, net | 14,601,554 | 5,865,077 | ||||||||||||||
Proceeds from issuance of prefunded warrants | 2,575,000 | 0 | ||||||||||||||
Proceeds from issuance of common stock, net | 4,662,125 | 14,601,554 | ||||||||||||||
Net Cash Provided by Financing Activities | 14,720,965 | 5,913,204 | ||||||||||||||
Net Cash provided by Financing Activities | 7,229,505 | 14,720,965 | ||||||||||||||
Gain (Loss) on Currency Translation | (700,412 | ) | (553,618 | ) | ||||||||||||
Gain on Currency Translation | 1,311,881 | (700,412 | ) | |||||||||||||
Net Change in Cash, Cash Equivalents and Restricted Cash | 7,860,297 | 1,375,396 | ||||||||||||||
Net change in Cash, Cash Equivalents and Restricted Cash | 4,708,617 | 7,860,297 | ||||||||||||||
Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 3,776,111 | 2,486,199 | 9,783,932 | 3,776,111 | ||||||||||||
Cash, Cash Equivalents and Restricted Cash at End of Period | $ | 11,636,408 | $ | 3,861,595 | $ | 14,492,549 | $ | 11,636,408 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest Paid | $ | 4,909 | $ | 54,655 | ||||
Income Taxes | $ | - | $ | - | ||||
Supplemental Disclosures of Non-Cash Investing and Financing: | ||||||||
Common stock issued for conversion of mandatory preferred stock | $ | - | $ | 8,803 | ||||
Offering costs for common stocks issuance | $ | 1,463,446 | $ | 747,423 | ||||
For the Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 83,014 | $ | 4,909 | ||||
Income Taxes | $ | 0 | $ | 0 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.
Management has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of September 30, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.
The consolidated financial statements include the accounts of LiqTech International, Inc., the “Company” and its subsidiaries. The terms "Company", “us", "we" and "our" as used in this report refer to the Company and its subsidiaries, which are set forth below. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide liquid applications and diesel particulate air filters in the United States, Canada, Europe, Asia and South America. Set forth below is a description of the Company and each of its subsidiaries:
LiqTech International, Inc., a Nevada corporation organized in July 2004, formerly known as Blue Moose Media, Inc.
LiqTech USA, a Delaware corporation and a 100% owned subsidiary of the Company formed in May 2011.
LiqTech Holding A/S (formerly known as LiqTech International A/S,S), a Danish corporation, incorporated on January 15, 2000 (“(“LiqTech Int. DK”Holding”), a 100% owned subsidiary of LiqTech USA, engages in development, design, application,handling all joint group activities such as management, marketing, and sales of membranes, ceramic diesel particulate and liquid filters and catalytic converters in Europe, Asia and South America.finance, IT etc.
LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100% owned subsidiary of LiqTech USA. LiqTech NA, Inc. engagesUSA, engaged in the production, marketing and sale of ceramic diesel particulate and liquid filters in the United States and Canada.
LiqTech Water A/S (formerly known as LiqTech Systems A/S,S), a Danish Corporation ("(“LiqTech Systems"Water”) was, incorporated on September 1, 2009, and engagesengaged in the manufacture of fully automated filtering systems for use within marine applications, municipal pool and spa applications, and other industrial applications within Denmark and international markets.
LiqTech Plastics A/S (formerly known as BS Plastic A/S,S), a Danish Corporation ("BS Plastic"(“LiqTech Plastics”) was, acquired on September 1, 2019, and engagesengaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.
LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019, engaged in the development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters, and catalytic converters in Europe, Asia and South America.
LiqTech Water Projects A/S, a Danish corporation (“LiqTech Water Projects”), incorporated on July 28, 2020 that is a dormant company without activity.
LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Int. DK,Holding, incorporated in Germany on December 9, 2011, engaged in marketing and sale of liquid filters in Germany. 2011. The Company is in the process of closing operations which is expected to be completed during 2019.as all activity in the company has ceased.
LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Int. DK,Holding, incorporated in Singapore on January 19, 2012, engaged in marketing and sale of liquid filters in Singapore and other countries in the area. 2012. The Company is in the process of closing operations which is expected to be completed during 2019.as all activity in the company has ceased.
Consolidation-- The consolidated financial statements include the accounts and operations of the Company.Company, its wholly-owned subsidiaries, and its majority-owned subsidiary. All material intercompany transactions and accounts have been eliminated in the consolidation.
Reclassification– Certain amounts presented in previous issued financial statements have been reclassified to be consistent with the presentation in the current period. In the statement of operations and comprehensive (loss), the Company has reclassified the prior year comparative amounts of general and administrative expenses and other expenses to be consistent with the current classification. Further contingent earn-out liability has been reclassified to accrued expenses considering an amendment to the original earn-out agreement from 2019 has changed the contingent liability to a fixed-amount liability.
Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Int. DK,Holding, LiqTech SystemsWater, LiqTech Plastics, LiqTech Ceramics and BS PlasticLiqTech Water Projects is the Danish Krone (“DKK”),; the functional currency of LiqTech Germany is the EuroEuro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The foreign subsidiaries balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the nine months ended September 30, 2019 2020 and 2018.2019. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.
Significant events -- In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid- March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increase all over the world, and tightening restrictions are again introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly on the production sites, and all employees who can work from home, is encouraged to do so.
We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second and third quarter of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products and transportation restrictions, especially if it results in a prolonged global recession.
Cash, Cash Equivalents and Restricted Cash-- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of September 30, 2020, and December 31, 2019, and 2018, the Company holds $1,678,936held $1,515,632 and $0,$2,714,173, respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders. The restricted cash is held in a local financial institutionorders and will be released as order deliveries is made and accepted byfor warranties after the customer.delivery of sales orders. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts at on September 30, 2019 2020 and December 31, 2018. 2019.
Accounts Receivable-- Accounts Receivablesreceivable consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence.
The roll forwardroll-forward of the allowance for doubtful accounts for the nine monthsperiod ended September 30, 2019 2020 and the year ended December 31, 2018 2019 is as follows:
September 30, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
Allowance for doubtful accounts at the beginning of the period | $ | 971,772 | $ | 660,581 | $ | 612,434 | $ | 971,772 | ||||||||
Addition from acquisition | 21,895 | - | ||||||||||||||
Bad debt expense | 3,763 | 353,562 | 334 | 25,044 | ||||||||||||
Receivables written off during the periods | (3,494 | ) | - | (468,728 | ) | (362,244 | ) | |||||||||
Effect of currency translation | (48,057 | ) | (42,371 | ) | 10,048 | (22,138 | ) | |||||||||
Allowance for doubtful accounts at the end of the period | $ | 945,879 | $ | 971,772 | $ | 154,089 | $ | 612,434 | ||||||||
Inventory --– Inventory directly purchased is carried at the lower of cost or market,net realizable value, as determined on the first-in, first-outfirst-in, first-out method.
For inventory produced, standard costs that approximate actual cost on the FIFO method are used to value inventory. Standard costs are reviewed at least annually by management, or more often in the event that circumstances indicate a change in cost has occurred.
Work in process and finished goods include material, labor and production overhead costs. The Company adjusts the value of its inventory to the extent that management determines that the cost cannot be recovered due to obsolescence or other factors.
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts.
Contracts Assets – Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract assets also includes unbilled receivables, which usually comprise the last invoice remaining after the delivery of the water treatment unit, where revenue is recognized at the transfer of control based upon signed acceptance of the water treatment unit by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.
Leases -- The Company leases certain vehicles, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The assets and liabilities under finance leases are recorded at the lower of the present value of future minimum lease payments or the fair market value of the related assets. Assets under finance leases are amortized using the straight-line method over the initial lease term. Amortization of assets under finance leases is included in depreciation expense.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,2016-02, Leases (“Topic 842”), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Subsequent ASUs were issued to provide additional guidance.
On January 1, 2019, the Company adopted Topic 842 using the optional transition method, of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which among other things, allowed the Company to carryforwardcarry forward the historical lease classification. The Company made the accounting policy elections to not recognize lease assets and lease liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and was reduced by accrued lease payments. The Company’s lease terms accounting may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease costcosts for lease payments will be recognized on a straight-line basis over the lease term. The impact of adoption on the Company’s consolidated balance sheet was the recognition of a ROU asset of $2.1 million and an operating lease liability of $2.1 million primarily for office space leases. The Company’s adoption of Topic 842 did not materially impact its results of operation.
Property and Equipment-- Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years.
Long-Term InvestmentsGoodwill and Intangible Assets -- Investments in non-consolidated companiesThe purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are included in long-term investmentsnot limited to, the cash flows that an asset is expected to generate in the consolidated balance sheetfuture and the appropriate weighted average cost of capital.
Acquired intangible assets with determinable useful lives are accounted for underamortized on a straight-line or accelerated basis over the cost methodestimated periods benefited, ranging from one to ten years. Customer relationships and equity method. For these non-quoted investments, we regularly reviewother non-contractual intangible assets with determinable lives are amortized over periods of five years.
The Company evaluates the assumptions underlyingrecoverability of long-lived assets by comparing the operating performance andcarrying amount of an asset to estimated future net undiscounted cash flow forecasts based on information requested from these privately held companies. Generally, this information mayflows generated by the asset. If such assets are considered to be more limited, may not beimpaired, the impairment recognized is measured as timely as and may be less accurate than information available from publicly traded companies. Assessing each investment'sthe amount by which the carrying value requires significant judgment by management. If it is determined that there is another than temporary decline inof the assets exceeds the fair value of a non-public equity security, we write down the investmentassets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, its fair valuerevenue growth rates, gross profit margins, and record the related write down as an investment loss in the consolidated statement of operations.
Intangible Assets -- Definite life intangible assets include patents. The Company accounts for definite life intangible assets in accordance with Financial Accounting Standards Board, (“FASB”) Accounting Standards Codification, (“ASC”) Topic 350, “Goodwill and Other Intangible Assets” and amortized the patents on a straight-line basisoperating expenses over the estimatedexpected remaining useful life of two to ten years. the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.
Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecast of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, using primarily expected category expansion, pricing, market segment fundamentals, and general economic conditions.
Revenue Recognition and Sales Incentives
Accounting policy--: On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015,2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018. The new revenue standard did not have a material impact on revenue recognition.
The Company sells products throughout the world; sales by geographical region are as follows for the three and nine months ended September 30, 2020 and 2019:
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
United States and Canada | $ | 122,135 | $ | 701,194 | $ | 556,097 | $ | 1,389,423 | ||||||||
Australia | 118,089 | 139,451 | 222,050 | 354,965 | ||||||||||||
South America | (1,972 | ) | 0 | 20,967 | 0 | |||||||||||
Asia | 358,430 | 2,962,521 | 2,684,474 | 5,135,327 | ||||||||||||
Europe | 2,947,048 | 5,869,550 | 14,983,469 | 19,511,385 | ||||||||||||
| $ | 3,543,730 | $ | 9,672,716 | $ | 18,467,057 | $ | 26,391,100 | |||||||||
The Company’s sales by product line are as follows for the three and nine months ended September 30, 2020 and 2019:
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Liquid filters and systems | $ | 1,899,160 | $ | 7,920,745 | $ | 12,431,157 | $ | 21,414,214 | ||||||||
Diesel particulate filters | 1,009,545 | 1,330,337 | 3,730,302 | 4,320,839 | ||||||||||||
Plastic components | 503,297 | 284,486 | 1,847,092 | 284,486 | ||||||||||||
Development projects | 131,728 | 137,148 | 458,506 | 371,561 | ||||||||||||
| $ | 3,543,730 | $ | 9,672,716 | $ | 18,467,057 | $ | 26,391,100 | |||||||||
For membranemembranes, diesel particulate filters and DPF product sales,plastic components, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the membrane, DPFproducts transfers to the customer or when services are transferred torendered by the customer.Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer. Revenue for service contracts are recognized as the services are provided. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a customer depositContract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.
For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost-plus margin.
System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer, which typically occurs upon shipment of the system based onin accordance with the terms of the contract. For the majority of systems, the Company transfers control and recognizes revenue when products are shipped to the customer according to the terms of the contract or purchase order. In connection with the system sale, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from theour production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Other Receivables, while the revenue related to the commissioning is recognized as Deferred Income.Contract assets.
Aftermarket sales represent parts, extended warrantywarranties and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer or services are provided.customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract. For invoicing to customers where the transfer of control has not occurred (prepayments), the invoiced amount is recognized as Contract assets / Contract liabilities.
The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our balance sheetssheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheetssheet as Contract liabilities.
In Denmark, Value Added Tax (“VAT”) of 25%Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the invoice amount is collected with respectcontractual agreement. Contract liabilities are payments received from customers prior to satisfaction of performance obligations, and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the sales of goods on behalf of tax authorities. The VAT collectedsecond performance obligation stated under Revenue Recognition, where the obligation is not revenueattributed to the commissioning of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities. water treatment system.
The Company’s disaggregated revenue roll-forward of Contract assets / liabilities for the period ended September 30, 2020 and December 31, 2019 is reported in Note 8.as follows:
September 30, 2020 | December 31, 2019 | |||||||
Cost incurred | $ | 3,563,346 | $ | 3,960,199 | ||||
Unbilled project deliveries | 1,365,926 | 1,971,106 | ||||||
VAT | 180,252 | 862,368 | ||||||
Other receivables | 120,227 | 58,397 | ||||||
Prepayments | (2,552,113 | ) | (1,732,231 | ) | ||||
Deferred Revenue | (1,096,715 | ) | (876,286 | ) | ||||
| $ | 1,580,923 | $ | 4,243,553 | |||||
Distributed as follows: | ||||||||
Contract assets | $ | 3,008,541 | $ | 5,664,929 | ||||
Contract liabilities | (1,427,618 | ) | (1,421,376 | ) | ||||
| $ | 1,580,923 | $ | 4,243,553 | |||||
Advertising Cost-- Costs incurred in connection with advertising of the Company’s products isare expensed as incurred. SuchAdvertising costs are included in sales expenses, and total advertising costs amounted to $8,280$82,545 and $21,693$80,630 for the threenine months ended September 30, 2020 and $80,630 and $25,0182019, respectively. Total advertising costs for the nine monthsthree months´ period ended September 30, 2019 2020 and 2018, respectively.2019 respectively, were $20,522 and $8,280.
Research and Development Cost-- The Company expenses research and development costs for the development of new products as incurred. Included in operating expense was $189,216 and $152,849 for the three months, and $591,572 and $498,526, for the nine months ended September 30, 2019 2020 and 20182019 were $883,752 and $591,572, respectively, of research and development costs. For the three months period ended September 30, 2020 and 2019, research and development costs were $256,239 and $189,216, respectively.
Income Taxes-- The Company accounts for income taxes in accordance with FASB ASC Topic 740 Accounting for Income Taxes. This statement requires an asset and liability approach forin accounting for income taxes.
Income Income/(Loss) Per Share-- The Company calculates earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings per common share (EPS) areis based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share areis based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential common shares included in the diluted earnings per share calculation include in-the-money stock options, RSUs, and warrants that have been granted but have not yet been exercised.
Stock Options and Awards-- The Company has granted stock options to certain key employees duringDuring the years presented in the accompanying consolidated financial statements, (see Note 7).the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Non-cashStock-based compensation costs of $23,167$270,238 and $5,833$174,778 have been recognized for the vesting of options and stock awards granted to Directors, management and certain key employees for the three months, and $174,778 and $93,267 for the nine months ended September 30, 2019 2020 and 2018,2019, respectively. For the three months´ period ended September 30, 2020 and 2019, stock-based compensation was $46,681 and $23,167 respectively.
Warrant Liability-- The Company issued common stock warrants in May 2020 in conjunction with an equity financing. In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants was initially classified as a liability on the Company’s Consolidated Balance Sheet because, according to the original terms of the warrant, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders, which was out of the control of the Company. On August 12, 2020 the terms of the prefunded warrant were amened and the potential obligation of the Company to pay cash to its warrant holders were removed. From the date of the execution of the amended warrant, it qualifies as an equity instrument and the liability measured at fair value on August 12, 2020 of $3,476,250 has been reclassified to the Company´s Equity. Corresponding changes in the fair value measurement of the warrants are recognized in earnings on the Company’s Consolidated Statement of Operations in each subsequent period.
Fair Value of Financial Instruments-- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, that,which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurringnon-recurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tierthree-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
● | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
● | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, investments, accounts payable and accrued expenses capital lease obligations and notes payable approximatesapproximate their recorded values due to their short-term maturities.
Accounting Estimates-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable,receivable; allowance for doubtful accounts; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill;goodwill and intangible assets; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; warrant liability; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.
Recent Accounting Pronouncements – In June 2018, March 2020, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Compensation (“Topic 718”ASU 2020-04, Reference Rate Reform (Topic 848): ImprovementsFacilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to Nonemployee Share-Based Payment Accounting, which expandsease the scope of Topic 718potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to include share-based payment transactions for acquiring goodscontract modifications and services from nonemployees except forhedging relationships, subject to meeting certain circumstances. Anycriteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition impactperiod and will be in effect for a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.limited time through December 31, 2022. Adoption is permitted at any time. The Company adopted this guidance inis currently evaluating the first quarter of 2019, and it did not have a material impact on its consolidated financial statements.
In August 2018, On March 9, 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Accounting Standards board (“FASB”)Instruments.” This ASU was issued Accounting Standards Update (“ASU”) 2018-15 (“ASU 2018-15”), Intangibles - Goodwillto clarify and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement thatimprove various financial instruments topics. The guidance has various effective dates but is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The updated guidance isbasically effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In August 2018, December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,2018-13, Fair Value Measurement (Topic 820)820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In August 2018, the SEC adopted amendments to simplify certain disclosure requirements, as set forth in Securities Act Release No. 33-10532, Disclosure Update and Simplification, which includes a requirement for entities to present the changes in shareholders’ equity in the interim financial statements in quarterly reports on Form 10-Q. This amendment is effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendment and proximity to the filing date for most filers’ quarterly reports, the SEC has allowed for a filer’s first presentation of the changes in shareholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date. The Company adopted the SEC’s amendment to interim disclosures in the first quarter of 2019 and has presented the changes in shareholders’ equity on an interim basis.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessees to recognize right-of-use ("ROU") assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. We adopted ASC 842 on January 1, 2019 using a modified retrospective transition approach for leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach did not require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording of ROU assets of approximately $2.1 million and lease liabilities of approximately $2.1 million for all of our lease agreements with original terms of greater than one year. The adoption of ASC 842 did not have a significant impact on our consolidated statements of operations. See Note 4 for the required disclosures relating to our lease agreements.
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18,2016-18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended September 30, 2019 2020, the Company has recorded $1,678,936$1,515,632 as Restricted cash, and $9,957,472$12,976,917 as Unrestricted cash, and a total of $11,636,408$14,492,549 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2018 2019, the amounts were $0$2,714,173 in Restricted cash and $3,776,111$7,069,759 in Unrestricted cash.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2016-13 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 2 - INVENTORY
Inventory consisted of the following at on September 30, 2019 2020 and December 31, 2018:2019:
2019 | 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
Furnace parts and supplies | $ | 611,911 | $ | 596,806 | $ | 906,503 | $ | 621,991 | ||||||||
Raw materials | 2,101,188 | 1,659,826 | 2,211,687 | 2,125,921 | ||||||||||||
Work in process | 1,644,988 | 1,691,175 | 2,653,085 | 1,624,499 | ||||||||||||
Finished goods and filtration systems | 1,608,185 | 1,596,042 | 960,775 | 1,492,135 | ||||||||||||
Reserve for obsolescence | (780,038 | ) | (1,111,794 | ) | (765,512 | ) | (665,308 | ) | ||||||||
Net Inventory | $ | 5,186,234 | $ | 4,432,055 | $ | 5,966,538 | $ | 5,199,238 | ||||||||
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movements, expected useful lives, and estimated future demand for the products.
NOTE 3 - LINES OF CREDIT
In connection with certain orders, we have to provide the customer with a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guaranteed credit line of DKK 94,620 (approximately $13,800 at September 30, 2019) with a bank, subject to certain base limitations. As of September 30, 2018, we had DKK 94,620 (approximately $14,690) in working guarantee against the credit line. The credit line is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by a restricted account at the bank of LiqTech Systems.
NOTE 4 - LEASES
The Company leases certain vehicles, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable operating leases for production and office space in Hobro, Aarhus and Copenhagen, andDenmark as well as in White Bear Lake, Minnesota.
On January 1, 2019,During the nine months ended September 30, 2020, cash paid for amounts included for the measurement of lease liabilities was $799,737, and the Company adopted Topic 842 requiring organizations thatrecorded operating lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The Company elected to use the transition methodexpense of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. As a result of the modified retrospective transition method of adoption, certain accounts lack a comparable value for the same period of 2018, specifically accounts and values associated with operating leases and ROU assets.$881,641.
Supplemental balance sheet information related to leases as of September 30, 2020 and December 31, 2019 and 2018 was as follows:follows
September 30, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
Operating leases: | ||||||||||||||||
Operating lease right-of-use | $ | 2,200,130 | $ | - | $ | 4,817,875 | $ | 5,053,614 | ||||||||
Operating lease liabilities – current | $ | 681,481 | $ | - | $ | 953,087 | $ | 999,685 | ||||||||
Operating lease liabilities – long-term | 1,561,076 | - | 4,028,986 | 4,141,855 | ||||||||||||
Total operating lease liabilities | $ | 2,242,557 | $ | - | $ | 4,982,073 | $ | 5,141,540 | ||||||||
Finance leases: | ||||||||||||||||
Property and equipment, at cost | $ | 1,115,891 | $ | 1,171,295 | $ | 1,429,958 | $ | 1,362,272 | ||||||||
Accumulated depreciation | (1,115,891 | ) | (1,162,256 | ) | (1,243,193 | ) | (1,156,145 | ) | ||||||||
Property and equipment, net | $ | - | $ | 9,039 | $ | 186,765 | $ | 206,127 | ||||||||
Finance lease liabilities – current | $ | - | $ | 13,789 | ||||||||||||
Finance lease liabilities - current | $ | 37,620 | $ | 34,772 | ||||||||||||
Finance lease liabilities – long-term | - | - | 152,476 | 172,273 | ||||||||||||
Total finance lease liabilities | $ | - | $ | 13,789 | $ | 190,096 | $ | 207,045 | ||||||||
Weighted average remaining lease term: | ||||||||||||||||
Operating leases | 4.3 | - | 10.2 | 10.2 | ||||||||||||
Finance lease | - | 0.8 | ||||||||||||||
Finance leases | 4.8 | 5.5 | ||||||||||||||
Weighted average discount rate: | ||||||||||||||||
Operating leases | 6.9 | % | - | 6.3 | % | 6.4 | % | |||||||||
Finance leases | - | % | 7.3 | % | 3.9 | % | 3.9 | % | ||||||||
Maturities of lease liabilities at September 30, 2019 2020 were as follows:
Operating lease | Finance lease | |||||||
October 2019 – September 2020 | $ | 711,058 | $ | - | ||||
October 2020 – September 2021 | 574,753 | - | ||||||
October 2021 – September 2022 | 468,283 | - | ||||||
October 2022 – September 2023 | 433,132 | - | ||||||
October 2023 – September 2024 | 357,179 | - | ||||||
Thereafter | - | - | ||||||
Total payment under lease agreements | 2,544,405 | - | ||||||
Less imputed interest | (301,848 | ) | - | |||||
Total lease liability | $ | 2,242,557 | $ | - | ||||
Operating lease | Finance lease | |||||||
2020 (remaining 3 months) | $ | 275,960 | $ | 11,098 | ||||
2021 | 930,047 | 44,391 | ||||||
2022 | 847,876 | 42,745 | ||||||
2023 | 801,928 | 37,893 | ||||||
2024 | 642,760 | 38,882 | ||||||
Thereafter | 3,182,473 | 34,166 | ||||||
Total payment under lease agreements | 6,681,044 | 209,175 | ||||||
Less imputed interest | (1,698,971 | ) | (19,079 | ) | ||||
Total lease liability | $ | 4,982,073 | $ | 190,096 | ||||
As previously disclosed in our 2018 Form 10-K under the prior guidance of ASC 842, minimum payments under operating lease agreements as of December 31, 2018 were as follows:
Year ending December 31, | Operating lease | |||
2019 | $ | 712,250 | ||
2020 | 578,997 | |||
2021 | 402,584 | |||
2022 | 350,249 | |||
Thereafter | 560,977 | |||
Total | $ | 2,605,057 | ||
NOTE 4 - LINES OF CREDIT
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $1,500,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $14,878 at September 30, 2020) with a bank, subject to certain base limitations. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Water such as receivables, inventory, and equipment.
NOTE 5 - AGREEMENTS AND COMMITMENTS
401(K)Agreements -- LiqTech Water Projects has entered into a joint venture agreement to supply and operate water treatment systems for oil and gas producers in the Middle East. The partner in the joint venture is a local company. LiqTech Water Projects expects to deliver technological know-how, design of water treatment systems and components to support potential projects in the Middle East. The joint venture will be established in the form of a jointly owned limited liability company, incorporated under the laws in the local country, and LiqTech Water Projects holds 49% of the shares. All profits of the company are to be allocated proportional to the ownership share and none of the parties are liable for the company’s liabilities towards third parties.
401(K) Profit Sharing Plan -- LiqTech NA has a 401(k)-profit401(k) profit sharing plan and trust covering certain eligible employees. The amount LiqTech NA contributes is discretionary. For the threenine months ended September 30, 2019 2020 and 2018,2019, matching contributions were expensed and totaled $3,007$10,844 and $2,569,$8,684, respectively. For the nine monthsthree months´ period ended September 30, 2019 2020 and 2018, the expense was $8,6842019, matching contributions expensed totaled $3,860 and $8,275,$3,007 respectively.
Contingencies -- -- From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.
On November 20, 2018 a former supplier to Liqtech International A/SHolding contacted the Company with a claim of DKK448,500DKK 448,500 ($68,800) alleging that a former Agreementan agreement from 2016 had not been respected. The Company has contested the claim due to lack of evidence to support the claim. No provision has been made at as of September 30, 2019 2020, as the Company believes that it has valid supporting defenses and does not expect the claim to materialize in any payments to the former supplier.
On February 27, 2019, LiqTech Systems A/SWater was contacted by a former supplier alleging that the Company owed DKK543,905DKK 543,905 ($83,400) for services rendered in 2017. The claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services supplied,rendered, and the claim was rejected by a court of law in 2018. Due to the nature of the new claim and the previous ruling from the court of law, no provision has been made at as of September 30, 2019.
In connection with certain orders, we have to provide the customer with a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guaranteed line of DKK 94,620 (approximately $13,800 at September 30, 2019) with a bank, subject to certain base limitations. As of September 30, 2018, we had DKK 94,620 (approximately $14,690) in working guarantees against the credit line. 2020.
Product Warranties - The Company provides a standard warranty on its systems, generally for a period of one to three years after customer acceptance. The Company estimates the costs which that may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.
In addition, the Company sells an extended warranty for certain systems, which generally provides a warranty for up to four years from the date of commissioning. The specific terms and conditions of thosethe warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.
The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim. The Company has assessed the adequacy of the recorded warranty liability at the end of the 3rd quarter 2019 based on realized warranty expenses for the 4 years passed since the start-up of delivery of water treatment systems. Based on the assessment, the Company has decided to reduce the warranty accrual from 7% to 3% of the sales value for delivered products since January 1, 2019 and going forward.
Changes in the Company's current and long-term warranty obligations including deferred revenue on extended warranty contracts included in accrued expenses on the balance sheet, areas of September 30, 2020 and December 31, 2019 were as follows:
September 30, 2020 | December 31, 2019 | |||||||
Balance at December 31 | $ | 813,288 | $ | 432,225 | ||||
Warranty costs charged to cost of goods sold | 326,740 | 707,079 | ||||||
Utilization charges against reserve | (130,129 | ) | (315,556 | ) | ||||
Release of accrual related to expired warranties | 0 | 0 | ||||||
Foreign currency effect | 48,818 | (10,460 | ) | |||||
Balance at September 30 | $ | 1,058,717 | $ | 813,288 | ||||
2019 | ||||
Balance at December 31, 2018 | $ | 432,225 | ||
Current year warranty expense | 621,142 | |||
Change in estimate related to pre-existing warranties | - | |||
Payments made | (307,596 | ) | ||
Foreign currency effect | (31,001 | ) | ||
Balance at September 30, 2019 | $ | 714,770 | ||
Purchase obligationObligation - The Company has a purchase obligation to the supplier of the new furnaces to thefor our production facility in Ballerup for which the Company has not received three units while the related goods.last unit will be delivered in late 2020. The total obligation amounts to $3.8 million as per September 30, 2019 of whichand the Company has prepaid $1.6 million as installments.entered into a leasing agreement with a bank to partly finance the purchase. The lease agreement will commence upon the receipt of all furnaces covered by the purchase contract. The Company has no right to cancel the order.
NOTE 6 - EARNINGS PER SHARE
Basic and diluted net income (loss) per common share is determined by dividing net income (loss) by the weighted average common shares outstanding during the period. For the periods where there is a net loss, stock options and warrants have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Consequently, the weighted average common shares used to calculate both basic and diluted net loss per common share would be the same.
The following data showsshow the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potentialpotentially dilutive common stock for the nine months ended September 30, 2019 2020 and 2018:2019:
For the Three Months | For the Nine Months | For the Nine Months Ended September 30, | ||||||||||||||||||||||
Ended September 30, | Ended September 30, | 2020 | 2019 | |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
Net Income (Loss) attributable to LiqTech International, Inc. | $ | 656,357 | $ | (921,949 | ) | $ | 837,387 | $ | (2,718,764 | ) | ||||||||||||||
Net Income (Loss) attributable to LiqTech International Inc. | $ | (6,133,731 | ) | $ | 837,387 | |||||||||||||||||||
Weighted average number of common shares used in basic earnings per share | 20,547,667 | 18,185,137 | 19,350,533 | 15,199,809 | 21,059,251 | 19,350,533 | ||||||||||||||||||
Effect of dilutive securities, stock options and warrants | 15,873 | - | 16,012 | - | ||||||||||||||||||||
Effect of dilutive securities, stock options, RSUs, and warrants | 0 | 16,012 | ||||||||||||||||||||||
Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share | 20,563,540 | 18,185,137 | 19,366,545 | 15,199,809 | 21,059,251 | 19,366,545 | ||||||||||||||||||
For the nine months ended September 30, 2020, the Company had 144,966 stock grants outstanding to issue common stock (RSUs). Further, the Company had 515,000 prefunded warrants outstanding to issue common stock.
For the nine months ended September 30, 2019,the Company had 49,878 stock grants outstanding to issue common stock (RSUs). Further, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share.
For the nine months ended
NOTE 7 - STOCKHOLDERS' EQUITY
Common Stock – As of September 30, 2018,2020 and 2019, respectively the Company had 113,750 options outstanding to purchase common stock at $2.96 per share and 100,000 warrants outstanding to purchase common stock at $6.60 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.
NOTE 7 - STOCKHOLDERS' EQUITY
Common Stock-- The Company has 25,000,000 authorized shares of common stock, $0.001 par value. As of September 30, 2019, 2020 and December 31, 2018,2019, respectively, there were 20,547,668 (after the 4-to-1 reverse stock split effective on April 8, 2019)21,655,461 and 18,228,88720,547,668 common shares issued and outstanding.
Voting -- Holders of the common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors.
Dividends -- Subject to the rights and preferences of the holders of any series of preferred stock, if any, which may at the time be outstanding, holders of the common stock are entitled to receive ratably such dividends as our Board of Directors from time to time may declare out of funds legally available. Our Board of Directors has not declared and paid dividends in the past and there are no plans to do so in the near future.
Liquidation Rights -- In the event of any liquidation, dissolution or winding-up of affairs, of the Company, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any outstanding shares of any series of our preferred stock, the holders of the common stock will be entitled to share ratably in the distribution of any of our remaining assets.
Other Matters -- Holders of the common stock have no conversion, preemptive or other subscription rights, and there are no redemption rights or sinking fund provisions with respect to our common stock. All of the issued and outstanding shares of common stock on the date of this Annual report are validly issued, fully paid and non-assessable.
Preferred Stock -- Our Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.
The Company has 2,500,000 authorized shares of preferredPreferred stock, $0.001 par value. As of September 30, 2019 2020, and December 31, 2018,2019 there were 0 mandatory convertible preferred shares issued and outstanding.
Stock IssuancesIssuance
Since January 1, 2019, 2020, the Company has made the following issuances of common stock (adjusted to account for the 4-to-1 reverse stock-split on April 8, 2019):stock:
On March 5, 2019, January 15, 2020, the Company issued an additional 24,8278,212 shares of restricted stock valued at $112,500$45,000 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.
On January 24, January 28, FebruaryMay 21, 2020, the Company completed a Securities Purchase Agreement with certain accredited investors in a private placement pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,662,127 including costs of $762,875 for placement fees, lawyer fees, auditor fees and other costs related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share, for gross proceeds of $2,575,000.
On June 6, 2020, the Company issued 8,333 shares of restricted stock valued at $69,333 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.
On July 8 and March 1, 2019, August 18, 2020, the Company issued a total of 45,0006,248 shares in connection with employees exercising stock options granted under the 2015 Stock Options Plan (the "Plan""2015 Plan"). The shares were issued at a share price of $2.96 and generated net proceeds of $133,200.$18,500.
For the nine months ended September 30, 2020 and 2019, the Company has recorded stock-based compensation expense of $270,238 and $174,778, respectively.
Warrants
In connection with the Securities Purchase Agreement entered into in May 2020, a prefunded warrant (“the Warrant”) to purchase an aggregate of 515,000 shares of Common Stock at a purchase price of $5.00 per share was issued. Subject to certain beneficial ownership limitations, the Warrant is immediately exercisable and may be exercised for no additional consideration. The Warrant does not expire. A holder of the Warrant will not have the right to exercise any portion of the Warrant if the holder, together with Affiliates and Attribution Parties (as such terms are defined in the Warrant), would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrant. Upon notice from the holder to the Company, however, the holder may decrease or increase the beneficial ownership limitation (but not above 9.99% of the number of shares of Common Stock outstanding).
On May 22, 2019,August 12, 2020 the prefunded warrant was amended. In the initial warrant, the warrant holder could request that the Company completedshould repay the value of the unexercised portion of warrants in case a registered public offeringfundamental transaction should occur. The amended agreement required the fundamental transaction to be approved by the Board of its common stock.Directors before any repayment could take place. This amendment changed the classification of the agreement from a liability to equity, and the following is a summary of the periodic changes in the fair value during the nine months ended September 30, 2020:
September 30, 2020 | ||||
Warrants outstanding January 1, 2020 | 0 | |||
Prefunded warrants issued May 2020 | 515,000 | |||
Exercises and conversions | 0 | |||
Warrants outstanding September 30, 2020 | 515,000 | |||
Stock-based Compensation
In 2013, the Company’s Board of Directors adopted a Share Incentive Plan (the “Incentive Plan”). Under the terms and conditions of the Incentive Plan, the Board of Directors is empowered to grant shares (Restricted Stock Units, or “RSUs”) to officers and directors of the Company. At closing,September 30, 2020, 144,966 shares were granted and outstanding under the Incentive Plan. Directors of the Company issued 2,215,862receive share compensation as follows: (i) an initial grant of 25,000 shares of common stock atthat vest over a three-year period upon appointment to the Board, followed by an annual grant of $30,000 in shares of common stock per annum after full vesting of the initial grant. Further the Company has granted shares to management for 2020 as part of the Incentive Plan, totaling 92,081 shares that vest over a three-year period.
The Company recognizes compensation costs for stock grants to Directors and management based on the stock price on the date of the grant.
The Company recognized stock-based compensation expense related to share pricegrants of $7.25$270,238 and generated net proceeds$174,778 for the nine months ended September 30, 2020 and 2019, respectively. For the three months’ period ended September 30, 2020 and 2019 respectively, the stock-based compensation related to share grants was $46,681 and $23,167. On September 30, 2020, the Company had $546,319 of $14,599,338 including cost of $1,463,446 for underwriter’s fee, lawyer’s fee, auditor’s fee and otherunrecognized compensation cost related to the capital raise.non-vested stock grants.
On June 6, 2019A summary of the Company issued an additional 28,887 shares in connection with a cashless exercisestatus of warrants issued in 2014.the RSU's outstanding as of September 30, 2020 and changes during the period are presented below:
For the nine months ended September 30, 2019 and 2018, the Company has recorded non-cash compensation expense of $62,278 and $33,267 relating to stock awards, respectively.
September 30, 2020 | ||||||||||||
Number of units | Weighted Average Fair value | Aggregated Intrinsic | ||||||||||
Outstanding, December 31, 2019 | 133,747 | $ | 5.47 | $ | 50,824 | |||||||
Granted | 44,430 | 5.92 | - | |||||||||
Vested and settled with share issuance | (33,211 | ) | 4.15 | - | ||||||||
Forfeited | 0 | 0 | - | |||||||||
Outstanding, September 30, 2020 | 144,966 | $ | 5.91 | $ | 304,714 | |||||||
Stock Options
In August 2015, the Company’s Board of Directors adopted the Option2015 Plan. Under the terms and conditions of the2015 Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At September 30, 2019, 25,0002020, 0 options were granted and outstanding under the2015 Plan.
The Company recognizes compensation costs for stock option awards to employees based on theirthe grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model.
The Company recognized stock-based compensation expense related to the options of $0 and $33,267 for the nine months ended September 30, 2019 2020 and 2018, respectively. At 2019. On September 30, 2019, 2020, the Company had $0 of unrecognized compensation cost related to non-vested options.
A summary of the status of the options outstanding under the Company’s stock option plan at plans on September 30, 2019 2020 is presented below:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise | Number | Weighted (years) | Weighted | Number | Weighted | |||||||||||||||||
| $ | 2.96 | 25,000 | 0.87 | $ | 2.96 | 25,000 | $ | 2.96 | ||||||||||||||
Total | 25,000 | 0.87 | $ | 2.96 | 25,000 | $ | 2.96 | |||||||||||||||
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise | Number | Weighted Life (years) | Weighted | Number | Weighted | |||||||||||||||||
| $ | - | - | - | $ | - | - | $ | - | ||||||||||||||
Total | - | - | $ | - | - | $ | - | |||||||||||||||
A summary of the status of the options at on September 30, 2019, 2020 and changes during the period is presented below:
Shares | Weighted | Average | Weighted | |||||||||||||
Outstanding at beginning of period | 70,000 | $ | 2.96 | 1.62 | $ | - | ||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | (45,000 | ) | - | - | - | |||||||||||
Forfeited | - | - | - | - | ||||||||||||
Expired | - | - | - | - | ||||||||||||
Outstanding at end of period | 25,000 | $ | 2.96 | 0.87 | $ | - | ||||||||||
Vested and expected to vest | 25,000 | $ | 2.96 | 0.87 | $ | - | ||||||||||
Exercisable end of period | 25,000 | $ | 2.96 | 0.87 | $ | - | ||||||||||
September 30, 2020 | ||||||||||||||||
Shares | Weighted | Average | Weighted | |||||||||||||
Outstanding at beginning of period | 25,000 | $ | 2.96 | 0.62 | $ | 72,250 | ||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | (6,250 | ) | 2.96 | - | - | |||||||||||
Forfeited | - | - | - | - | ||||||||||||
Expired | (18,750 | ) | - | - | - | |||||||||||
Outstanding at end of period | 0 | $ | 0 | - | $ | 0 | ||||||||||
Vested and expected to vest | - | $ | - | - | $ | 0 | ||||||||||
Exercisable end of period | - | $ | - | - | $ | 0 | ||||||||||
NOTE 8 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE
The following table presents customers accounting for 10% or more of the Company’s net salesrevenue:
For the Three Months | For the Nine Months | For the Three Months | For the Nine Months | |||||||||||||||||||||||||||||
Ended September 30, | Ended September 30, | Ended September 30, | Ended September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Customer A | 34 | % | * | 31 | % | * | 23 | % | 34 | % | 27 | % | 31 | % | ||||||||||||||||||
Customer B | * | * | 20 | % | * | 20 | % | * | 11 | % | * | |||||||||||||||||||||
Customer C | 28 | % | * | 17 | % | * | * | * | * | 20 | % | |||||||||||||||||||||
Customer D | * | 28 | % | * | 17 | % | ||||||||||||||||||||||||||
* Zero or less than 10%
The following table presents customers accounting for 10% or more of the Company’s account receivablesaccounts receivables:
September 30, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
Customer A | 49 | % | 58 | % | 32 | % | 39 | % | ||||||||
Customer C | 16 | % | * | |||||||||||||
Customer B | 15 | % | 15 | % | ||||||||||||
Customer D | 10 | % | * | |||||||||||||
Customer E | * | 17 | % | |||||||||||||
* Zero or less than 10%
The Company sells products throughout the world; disaggregated revenue by geographical region is as follows for the three and nine months ended September 30, 2019 and 2018:
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
United States and Canada | $ | 701,194 | $ | 273,806 | $ | 1,389,423 | $ | 643,556 | ||||||||
Australia | 139,451 | 181,174 | 354,965 | 463,967 | ||||||||||||
South America | - | 22,775 | - | 50,452 | ||||||||||||
Asia | 2,962,521 | 154,715 | 5,135,327 | 1,083,332 | ||||||||||||
Europe | 5,869,550 | 2,714,734 | 19,511,385 | 7,095,307 | ||||||||||||
| $ | 9,672,716 | $ | 3,347,204 | $ | 26,391,100 | $ | 9,336,614 | |||||||||
The Company’s disaggregated revenue by product line is as follows for the three and nine months ended September 30, 2019 and 2018:
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Ceramic diesel particulate | $ | 1,330,337 | $ | 1,841,136 | $ | 4,320,839 | $ | 5,085,203 | ||||||||
Liquid filters and systems | 7,920,745 | 1,426,107 | 21,414,214 | 3,878,355 | ||||||||||||
Development projects | 137,148 | 79,961 | 371,561 | 373,056 | ||||||||||||
Plastic products | 284,486 | - | 284,486 | - | ||||||||||||
| $ | 9,672,716 | $ | 3,347,204 | $ | 26,391,100 | $ | 9,336,614 | |||||||||
As of September 30, 2019, 2020, approximately 90%98% and 2% of the Company’s assets were located in Denmark and 10% in the United States.States, respectively. As of September 30, 2018, December 31, 2019, approximately 91% and 9% of the Company’s assets were located in Denmark and 9% in the United States.States, respectively.
NOTE 9 - ACQUISITION
On September 4, 2019 our wholly owned subsidiary LiqTech International acquired the outstanding equity of BS Plastic, a specialized plastic manufacturer based in Denmark. The acquisition allows LiqTech to in-source certain components of its proprietary ceramic silicon carbide water filtration systems for closed loop marine scrubber applications.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase accounting process has not been completed primarily because the valuation of acquired assets has not been finalized. We expect to complete the purchase accounting as soon as practicable but no later than one year from the acquisition date. We do not believe there will be material adjustments. The initial purchase price of $1,332,090 was funded through existing cash. The prior equity holder of BS Plastic may also receive an additional $888,060 if certain targets are met on an annual basis over the next 3 years. This contingent earn-out is accrued as long-term and short-term liability in the balance sheet. Based on the estimated fair value at the time of purchase, the Company recorded an estimate of intangible assets in the amount of $614,300 which may include goodwill once the final valuation analysis is completed.
The purchase price calculation is as follows:
Cash | $ | 1,332,090 | ||
Liabilities short-term | 296,020 | |||
Liabilities long-term | 592,040 | |||
Total | $ | 2,220,150 |
The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of purchase:
Cash and bank balances | $ | 177,188 | ||
Account receivables | 600,441 | |||
Inventory | 323,403 | |||
Other receivables / deferred expenses | 59,235 | |||
Deposits | 53,304 | |||
Property and Equipment | 1,397,421 | |||
Account payables | (99,490 | ) | ||
Other debt and accrued expenses | (660,990 | ) | ||
Accrued income tax | (31,146 | ) | ||
Deferred tax liability | (213,516 | ) | ||
| 1,605,850 | ||||
Goodwill | 614,300 | |||
| $ | 2,220,150 |
Transaction and other costs directly related to the acquisition of BS Plastic A/S, consisting primarily of professional fees, have amounted to approximately $29,500 and were expensed as incurred and are included in general and administrative expenses.
NOTE 109 - SUBSEQUENT EVENTS
The Company’s management reviewed material events through November 14, 2019 and there were no subsequent events to report.9, 2020.
On November 3, 2020, the Company amended its Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 25,000,000 shares to 100,000,000 shares following approval by the Company’s shareholders at the annual meeting held on October 29, 2020.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019,March 30, 2020 and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Overview
We areLiqTech International, Inc. is a clean technology company that provides state-of-the-art technologiesproducts for gas and liquid purification by manufacturing ceramic silicon carbide filters. For more than a decade, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in twothree business areas: ceramic membranes for liquid filtration, and diesel particulate filters (“DPF“)(DPFs) for the control of soot exhaust particles from diesel engines.engines and plastic components for usage in various industries. Using nanotechnology, we develop proprietary products using patented silicon carbide technology. Our products are based on unique silicon carbide membranes whichthat facilitate new applications and improve existing technologies. We market our products from our offices in Denmark and the United States and Denmark, and through local representatives.representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark and the United States and Denmark.States.
The terms “LiqTech”, “we”, “our”, “us”, the “Company” or any derivative thereof, as used herein, refer to LiqTech International, Inc., a Nevada corporation, together with its direct and indirect wholly ownedwholly-owned subsidiaries, including LiqTech USA, Inc., a Delaware corporation (“LiqTech USA”), which owns all of the outstanding equity interest in and LiqTech NA, Inc., a Delaware corporation (“LiqTech NA”) andHolding A/S (formerly known as LiqTech International A/S,S), a Danish limited company organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Int. DK”Holding”), together with its direct wholly ownedwholly-owned subsidiaries LiqTech Water A/S (formerly known as LiqTech Systems A/S) (“LiqTech Water”), LiqTech Ceramics A/S a(“LiqTech Ceramics”) and LiqTech Plastics A/S (formerly known as BS Plastic A/S) (“LiqTech Plastics”), three Danish limited company,companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark and LiqTech NA, Inc., a Delaware corporation (“LiqTech Systems”) and BS Plastic A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“BS Plastic”NA”). Collectively, LiqTech USA, LiqTech Int. DK,Holding, LiqTech Systems, BS PlasticWater, LiqTech Ceramics, LiqTech Plastics and LiqTech NA are referred to herein as our “Subsidiaries”.
We conduct operations in the Kingdom of Denmark and the United States. Our Danish DPF and membrane manufacturing operations are located in the Copenhagen area, LiqTech Systems’ assemblyHobro and testing operations are located in Hobro in Jutland, DenmarkAarhus, and the plastic manufacturing plant of BS Plastic are located in Aarhus in Jutland, Denmark. Ourour U.S. operations are conducted by LiqTech NA located in White Bear Lake, Minnesota.
As part of our cost reduction plan and due to several years of declining activity, we have decided to start the process of closing down operations in LiqTech NA.
Our Strategy
Our strategy is to create stockholder value by leveraging our competitive strengths in silicon carbide filters and membranes by focusing on discrete applications in key end markets. Essential features of our strategy include:
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Developments
Results of Operations
The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.
Comparison of the Three Months Ended September 30, 2020 and September 30, 2019
The following tables settable sets forth our revenues, expenses and net income for the three and nine months ended September 30, 20192020 and 2018:2019:
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
Period to Period Change | Period to Period Change | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | As a % of Sales | 2018 | As a % of Sales | US$ | Percent % | 2020 | As a % of Sales | 2019 | As a % of Sales | US$ | Percent % | |||||||||||||||||||||||||||||||||||||
Net Sales | 9,672,716 | 100.0 | % | 3,347,204 | 100.0 | % | 6,325,512 | 189.0 | % | |||||||||||||||||||||||||||||||||||||||
Revenue | 3,543,730 | 100.0 | % | 9,672,716 | 100.0 | % | (6,128,986 | ) | (63.4 | )% | ||||||||||||||||||||||||||||||||||||||
Cost of Goods Sold | 7,444,978 | 77.0 | 3,058,465 | 91.4 | 4,386,513 | 143.4 | 3,852,210 | 108.7 | 7,444,978 | 77.0 | (3,592,768 | ) | (48.3 | ) | ||||||||||||||||||||||||||||||||||
Gross Profit | 2,227,738 | 23.0 | 288,739 | 8.6 | 1,938,999 | 671.5 | (308,480 | ) | (8.7 | ) | 2,227,738 | 23.0 | (2,536,218 | ) | (113.8 | ) | ||||||||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||||||||||||||||||
Selling expenses | 461,010 | 4.8 | 414,504 | 12.4 | 46,506 | 11.2 | 741,738 | 20.9 | 461,010 | 4.8 | 280,728 | 60.9 | ||||||||||||||||||||||||||||||||||||
General and administrative expenses | 1,318,505 | 13.6 | 663,547 | 19.8 | 654,958 | 98.7 | 1,526,327 | 43.1 | 1,353,428 | 14.0 | 172,899 | 12.8 | ||||||||||||||||||||||||||||||||||||
Research and development expenses | 189,216 | 2.0 | 152,849 | 4.6 | 36,367 | 23.8 | 256,239 | 7.2 | 189,216 | 2.0 | 67,023 | 35.4 | ||||||||||||||||||||||||||||||||||||
Total Operating Expenses | 1,968,731 | 20.4 | 1,230,900 | 36.8 | 737,831 | 59.9 | 2,524,304 | 71.2 | 2,003,654 | 20.7 | 520,650 | 26.0 | ||||||||||||||||||||||||||||||||||||
Profit (Loss) from Operation | 259,007 | 2.7 | (942,161 | ) | (28.1 | ) | 1,201,168 | (127.5 | ) | (2,832,784 | ) | (79.9 | ) | 224,084 | 2.3 | (3,056,868 | ) | (1,364.2 | ) | |||||||||||||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||||||||||||||||||
Gain on modification of earn-out liability | 301,573 | 8.5 | - | - | 301,573 | - | ||||||||||||||||||||||||||||||||||||||||||
Interest and other income | 28,736 | 0.3 | 1,814 | 0.1 | 26,922 | 1,484.1 | 8,164 | 0.2 | 28,736 | 0.3 | (20,572 | ) | (71.6 | ) | ||||||||||||||||||||||||||||||||||
Interest (expense) | (35,292 | ) | (0.4 | ) | (5,463 | ) | (0.2 | ) | (29,829 | ) | 546.0 | |||||||||||||||||||||||||||||||||||||
Interest expense | (41,388 | ) | (1.2 | ) | (369 | ) | (0.0 | ) | (41,019 | ) | 11,116.3 | |||||||||||||||||||||||||||||||||||||
Fair value adjustment of warrants | (664,350 | ) | (18.7 | ) | - | - | (664,350 | ) | - | |||||||||||||||||||||||||||||||||||||||
Gain (loss) on currency transactions | 403,432 | 4.2 | 23,861 | 0.7 | 379,571 | 1,590.8 | (660,747 | ) | (18.6 | ) | 403,432 | 4.2 | (1,064,179 | ) | (263.8 | ) | ||||||||||||||||||||||||||||||||
Gain (loss) on sale of fixed assets | 474 | 0.0 | - | - | 474 | - | - | - | 474 | 0.0 | (474 | ) | (100.0 | ) | ||||||||||||||||||||||||||||||||||
Total Other Income (Expense) | 397,350 | 4.1 | 20,212 | 0.6 | 377,138 | 1,865.9 | (1,056,748 | ) | (29.8 | ) | 432,273 | 4.5 | (1,489,021 | ) | (344.5 | ) | ||||||||||||||||||||||||||||||||
Profit (loss) Before Income Taxes | 656,357 | 6.8 | (921,949 | ) | (27.5 | ) | 1,578,306 | (171.2 | ) | (3,889,532 | ) | (109.8 | ) | 656,357 | 6.8 | (4,545,889 | ) | (692.6 | ) | |||||||||||||||||||||||||||||
Income Taxes Expense (Income) | - | - | - | - | - | - | (16,113 | ) | (0.5 | ) | - | - | (16,113 | ) | - | |||||||||||||||||||||||||||||||||
Net Profit (loss) | 656,357 | 6.8 | (921,949 | ) | (27.5 | ) | 1,578,306 | (171.2 | ) | (3,873,419 | ) | (109.3 | ) | 656,357 | 6.8 | (4,529,776 | ) | (690.1 | ) | |||||||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
Period to Period Change | ||||||||||||||||||||||||
2019 | As a % of Sales | 2018 | As a % of Sales | $ | Percent % | |||||||||||||||||||
Net Sales | 26,391,100 | 100.0 | % | 9,336,614 | 100.0 | % | 17,054,486 | 182.7 | % | |||||||||||||||
Cost of Goods Sold | 20,613,172 | 78.1 | 8,447,645 | 90.5 | 12,165,527 | 144.0 | ||||||||||||||||||
Gross Profit | 5,777,928 | 21.9 | 888,969 | 9.5 | 4,888,959 | 550.0 | ||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||
Selling expenses | 1,458,633 | 5.5 | 1,288,294 | 13.8 | 170,339 | 13.2 | ||||||||||||||||||
General and administrative expenses | 3,057,807 | 11.6 | 2,008,194 | 21.5 | 1,049,613 | 52.3 | ||||||||||||||||||
Research and development expenses | 591,572 | 2.2 | 498,526 | 5.3 | 93,046 | 18.7 | ||||||||||||||||||
Total Operating Expenses | 5,108,012 | 19.4 | 3,795,014 | 40.6 | 1,312,998 | 34.6 | ||||||||||||||||||
Profit (loss) from Operation | 669,916 | 2.5 | (2,906,045 | ) | (31.1 | ) | 3,575,961 | (123.1 | ) | |||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||
Interest and other income | 54,186 | 0.2 | 12,271 | 0.1 | 41,915 | 341.6 | ||||||||||||||||||
Interest (expense) | (110,442 | ) | (0.4 | ) | (65,937 | ) | (0.7 | ) | (44,505 | ) | 67.5 | |||||||||||||
Gain (Loss) on currency transactions | 244,872 | 0.9 | 240,947 | 2.6 | 3,925 | 1.6 | ||||||||||||||||||
Gain (Loss) on sale of fixed assets | (21,145 | ) | (0.1 | ) | - | - | (21,145 | ) | - | |||||||||||||||
Total Other Income (Expense) | 167,471 | 0.6 | 187,281 | 2.0 | (19,810 | ) | (10.6 | ) | ||||||||||||||||
Profit (loss) Before Income Taxes | 837,387 | 3.2 | (2,718,764 | ) | (29.1 | ) | 3,556,151 | (130.8 | ) | |||||||||||||||
Income Taxes Expense (Income) | - | - | - | - | - | - | ||||||||||||||||||
Net Profit (loss) | 837,387 | 3.2 | (2,718,764 | ) | (29.1 | ) | 3,556,151 | (130.8 | ) | |||||||||||||||
Comparison of the Three Months Ended September 30, 2019 and September 30, 2018
Revenues
Net salesRevenue for the three months ended September 30, 2019 were $9,672,7162020 was $3,543,730 compared to $3,347,204$9,672,716 for the same period in 2018,2019, representing an increasea decrease of $6,325,512$6,128,986, or 189%63%. The increasechange in revenue consists of a decrease in sales consisted of liquid filters of $6,021,586 and in sales of DPFs of $320,792, offset by an increase in sales of liquid filters and systemsplastics of $6,494,640, a$218,811. The decrease in sales of DPF of $510,800 and an increase in revenue related to development projects of $57,188. Further, the revenue from plastic products (acquired at September 1, 2019) amounted to $284,486. The increase in revenue for our liquid filters and water treatment systems is duea result of the negative impact of the COVID-19 virus that has caused a significant decrease in new orders since the start of 2020. The demand for our DPFs also decreased in the period, but we see increased interest in environmental solutions to projectsreduce global CO2-emissions, and received new orders in the third quarter of 2020. The increase in sales of plastic components is related to the marine scrubber industry. The decreasebusiness acquired in our DPF revenue is mainly due to a decrease in demand compared to the same period last year.September 2019.
Gross Profit
Gross profit for the three months ended September 30, 20192020 was $2,227,738$(308,480) compared to a gross profit of $288,739$2,227,738 for the same period in 2018,2019, representing an increasea decrease of $1,938,999$2,536,218 or 671.5%114%. The increasedecrease in gross profit wasis due to highthe decline in sales activity, even though that several low margin strategic projects were delivered withof liquid filters and water treatment systems where sales command a lowhigher gross margin. This was offsetresulted in the gross profit being negatively impacted by improved manufacturing costs and also a reassessmentrelated to decisions made prior to the impact of COVID-19, as the Company had decided to ramp-up investments in additional employees, improvement of the warranty provisionsbusiness facilities and other fixed costs that are now included in Cost of Goods sold. Further the initial effect of closing our activities in North America has resulted in a write-off of inventory in the amount of $170,000, which contributed to improvedhas been expensed in the period. Included in the gross profit.profit is depreciation of $476,705 and $298,576 for the three months ended September 30, 2020 and 2019, respectively.
Expenses
Total operating expenses for the three months ended September 30, 20192020 were $1,968,731,$2,524,304, representing an increase of $737,831,$520,650, or 59.9%26%, compared to $1,230,900$2,003,654 for the same period in 2018. This increase in operating2019.
Selling expenses is attributablefor the three months ended September 30, 2020 were $741,738 compared to an increase in general and administrative expenses of $654,958, or 98.7%, and an increase in selling expenses of $46,506 or 11.2% and an increase in research and development expenses of $36,367, or 23.8%, compared to$461,010 for the same period in 2018.2019, representing an increase of $280,728 or 61%. This change is attributable to the pre COVID-19 decision of adding new sales employees to grow future sales and the average of sales employees has therefore increased from 9 in 2019 to 12 in 2020. Other expenses related to the update of the Company’s website and other marketing materials have also resulted in increased selling expenses.
The main reason for the increase in operating expenses is the hiring of additional employees in administration (finance, supply change management and project managers) and related expenses (purchase of IT equipment, office furniture, HR consultants etc.). Further costs for consultants assisting in preparing for SOX404 compliance has impacted expenses for the quarter.
Non-cash compensation, included in generalGeneral and administrative expenses for the three months ended September 30, 20192020 were $23,167,$1,526,327 compared to $5,833$1,353,428 for the same period in 2018,2019, representing an increase of $17,334,$172,899, or 297.2%13%. ThisIncluded in expenses for the three months ended September 30, 2020 is an estimated write-off of $200,000 related to the valuation of the remaining fixed assets in LiqTech NA. Further, the increase in expenses is attributable to the addition of administrative employees, where the number of employees increased from 17 in 2019 to 20 in 2020. The increase in the number of employees also created additional IT and office costs. As part of the cost reductions implemented after the impact of the COVID-19, several employees have exited as of September 30, 2020. Included in general and administrative expenses is non-cash compensation expenseexpenses of $46,681 and $23,167 for restricted share units grantedthe three months ended September 30, 2020 and September 30, 2019, respectively, representing an increase of $23,514, or 101%, attributable to directors.stock grants to members of the Board and management.
The following is a summary of our non-cash compensation:
For the Three Months Ended September 30, | For the Three Months Ended | |||||||||||||||
2019 | 2018 | September 30, | September 30, | |||||||||||||
Compensation for vesting of restricted stock awards issued to the board of directors | $ | 23,167 | $ | 5,833 | ||||||||||||
2020 | 2019 | |||||||||||||||
Compensation for vesting of restricted stock awards issued to the Board of Directors | $ | 5,014 | $ | 23,167 | ||||||||||||
Compensation for vesting of restricted stock awards issued to management | 41,667 | - | ||||||||||||||
Total Non-Cash Compensation | $ | 23,167 | $ | 5,833 | $ | 46,681 | $ | 23,167 | ||||||||
Net Income
Net profitResearch and development expenses for the three months ended September 30, 2019 was $656,3572020 were $256,239 compared to a loss of $921,949$189,216 for the comparable period in 2018, representing a change of $1,578,306. This improvement was attributable to the substantial increase in revenue and gross profit for the three months ending September 30, 2019, compared to the same period in 2018. Included2019, representing an increase of $67,023, or 35%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry.
Other Income (Loss)
Net Profit is Other Income/Expenses which amounts toother income of $397,350(loss) for the three months ended September 30, 2020 was $(1,056,748) compared to $432,273 for the comparable period in 2019, representing a decrease of $1,489,021. Included in the net expenses for the three months ended September 30, 2020 is the negative effect of $664,350 resulting from the fair value measurement of the prefunded warrants issued in May 2020. The agreement was changed in August 2020 resulting in a reclassification of the warrant from debt to an equity instrument that does not require fair value measurement. Additionally, losses on currency translations due to the negative impact of the USD/DKK exchange rate has impacted Net other income (loss) for the period, resulting in an expense of $660,747 compared to income of $20,212$403,432 in the comparable period and representing a decrease of $1,064,179, or 264%. Further Net income (loss) is positively affected by $301,573 relating to the gain on modification of the earn-out agreement with the former owner of BS Plastic A/S, where the former owner has agreed to reduce the earn-out consideration from a total of DKK 6 million over three years to a fixed earn-out of DKK 4 million over a period of two years.
Net Income (Loss)
Net income (loss) for the samethree months ended September 30, 2020 was $(3,873,419) compared to $656,357 for the comparable period in 2018. The2019, representing a decrease of $4,529,776.
This change was primarily attributable to the significant decrease in revenue and the increase in Net Other Income/Expense of $377,138 is principally relatedoperating expenses caused primarily by the growth in headcount to gain onsupport additional sales and production that was negatively impacted by COVID-19. Additionally, the fair value measurement associated with the warrant liability and the negative adjustment caused by currency exchanges.translation as described above further widened the net loss for the period ended September 30, 2020.
Comparison of the Nine Months Ended September 30, 20192020 and September 30, 20182019
The following table sets forth our revenues, expenses and net income for the nine months ended September 30, 2020 and 2019:
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Period to Period Change |
| |||||
|
| 2020 |
|
| As a % of Sales |
|
| 2019 |
|
| As a % of Sales |
|
| $ |
|
| Percent % |
| ||||||
Revenue |
|
| 18,467,057 |
|
|
| 100.0 | % |
|
| 26,391,100 |
|
|
| 100.0 | % |
|
| (7,924,043 | ) |
|
| (30.0 | )% |
Cost of Goods Sold |
|
| 15,641,998 |
|
|
| 84.7 |
|
|
| 20,613,172 |
|
|
| 78.1 |
|
|
| (4,971,174 | ) |
|
| (24.1 | ) |
Gross Profit |
|
| 2,825,059 |
|
|
| 15.3 |
|
|
| 5,777,928 |
|
|
| 21.9 |
|
|
| (2,952,869 | ) |
|
| (51.1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
| 2,024,485 |
|
|
| 11.0 |
|
|
| 1,458,633 |
|
|
| 5.5 |
|
|
| 565,852 |
|
|
| 38.8 |
|
General and administrative expenses |
|
| 4,585,857 |
|
|
| 24.8 |
|
|
| 3,161,855 |
|
|
| 12.0 |
|
|
| 1,424,002 |
|
|
| 45.0 |
|
Research and development expenses |
|
| 883,752 |
|
|
| 4.8 |
|
|
| 591,572 |
|
|
| 2.2 |
|
|
| 292,180 |
|
|
| 49.4 |
|
Total Operating Expenses |
|
| 7,494,094 |
|
|
| 40.6 |
|
|
| 5,212,060 |
|
|
| 19.7 |
|
|
| 2,282,034 |
|
|
| 43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss) from Operations |
|
| (4,669,035 | ) |
|
| (25.3 | ) |
|
| 565,868 |
|
|
| 2.1 |
|
|
| (5,234,903 | ) |
|
| (925.1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on modification of the earn-out agreement |
|
| 301,573 |
|
|
| 1.6 |
|
|
| - |
|
|
| - |
|
|
| 301,573 |
|
| - | ||
| Interest and other income | 12,901 | 0.1 | 54,186 | 0.2 | (41,285 | ) | (76.2 | ) | ||||||||||||||||
Interest (expense) |
|
| (102,926 | ) |
|
| (0.6 | ) |
|
| (6,394 | ) |
|
| (0.0 | ) |
|
| (96,532 | ) |
|
| 1,509.7 |
|
Fair value adjustment of warrants |
|
| (901,250 | ) |
|
| (4.9 | ) |
|
| - |
|
|
| - |
|
|
| (901,250 | ) |
|
| - |
|
Loss on currency transactions |
|
| (821,681 | ) |
|
| (4.4 | ) |
|
| 244,872 |
|
| (0.9 | ) |
|
| (1,066,553 | ) |
|
| (435.6 | ) | |
Gain (loss) on sale of fixed assets |
|
| - |
|
|
| - |
|
|
| (21,145 | ) |
|
| (0.1 | ) |
|
| 21,145 |
|
|
| (100.0 | ) |
Total Other Income (Expense) |
|
| (1,511,383 | ) |
|
| (8.2 | ) |
|
| 271,519 |
|
| 1.0 |
|
| (1,782,902 | ) |
|
| (656.6 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss) Before Income Taxes |
|
| (6,180,418 | ) |
|
| (33.5 | ) |
|
| 837,387 |
|
|
| 3.2 |
|
|
| (7,017,805 | ) |
|
| (838.1 | ) |
Income Taxes Expense (Income) |
|
| (46,687 | ) |
|
| (0.3 | ) |
|
| - |
|
|
| - |
|
|
| (46,687 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Profit (Loss) |
|
| (6,133,731 | ) |
|
| (33.2 | ) |
|
| 837,387 |
|
|
| 3.2 |
|
|
| (6,971,118 | ) |
|
| (832.5 | ) |
Revenues
Net salesRevenue for the nine months ended September 30, 2019 were $26,391,1002020 was $18,467,057 compared to $9,336,614$26,391,100 for the same period in 2018,2019, representing an increasea decrease of $17,054,486$7,924,043 or 182.7%30%. The increasechange in sales consistedrevenue consists of an increasea decrease in sales of liquid filters and water treatment systems of $17,535,860,$8,983,058 and a decrease of sales in DPFs of $590,537, offset by an increase in sales of DPFplastics of $764,365$1,562,606 and a decreasean increase in sales of development projects of $1,495. Further, the revenue from plastic products (acquired at September 1, 2019) amounted to $284,486.$86,946. The increase in revenuesales of plastic components is related to the business acquired in September 2019. The decrease in demand for our liquid filters, and water treatment systems and DPFs is mainly due to projects related toimpacts of the ongoing COVID-19 pandemic, which have resulted in significant restrictions and business limitations across the globe, causing a significant decline in delivery of water treatment systems for the marine scrubber industry. The decrease in our DPF revenue is mainly due to a decrease in demand compared to the same period last year.
Gross Profit
Gross profit for the nine months ended September 30, 20192020 was $5,777,928$2,825,059 compared to a gross profit of $888,969$5,777,928 for the same period in 2018,2019, representing an increasea decrease of $4,888,959$2,952,869, or 550%51%. The increasedecrease in gross profit wasis due to the highdecline in sales activity for ourof liquid filters and water treatment systems, which havewhere sales command a higher gross margin. Included in the gross profit is depreciation of $1,384,344 and $724,205 for the nine months ended September 30, 2020 and 2019, respectively.
Expenses
Total operating expenses for the nine months ended September 30, 20192020 were $5,108,012$7,494,094, representing an increase of $1,312,998$2,282,034, or 34.6%44%, compared to $3,795,014$5,212,060 for the same period in 2018.2019.
Selling expenses for the nine months ended September 30, 2020 were $2,024,485 compared to $1,458,633 for the same period in 2019, representing an increase of $565,852, or 39%. This increase in operating expenseschange is attributable to the addition of new sales employees from an increaseaverage of 9 in general and administrative expenses2019 to an average of $1,049,613, or 52.3%, an increase12 in research and development expenses of $93,046, or 18.7%, and an increase in selling expenses of $170,339, or 13.2%, which include expenses related to marketing.2020.
The main reason for the increase in operating expenses is the hiring of additional employees in administration (finance, supply change management and project managers) and related expenses (purchase of IT equipment, office furniture, HR consultants etc.).
Non-cash compensation, included in generalGeneral and administrative expenses for the nine months ended September 30, 2019 was $174,778,2020 were $4,585,857 compared to $93,267$3,161,855 for the same period in 2018,2019, representing an increase of $81,511,$1,424,002, or 87.4%45%. ThisIncluded in expenses for the nine months ended September 30, 2020 is an estimated write-off of $200,000 related to the valuation of the remaining fixed assets in LiqTech North America. Further the increase is attributable to the addition of administrative employees, where the number of employees increased non-cashfrom 13 in 2019 to 23 in 2020. The increase in the number of employees also created additional IT and office costs. Included in general and administrative expenses is Non-cash compensation expenseexpenses that were $270,238 and $174,778 for restricted share units grantedthe nine months ended September 30, 2020 and September 30, 2019, respectively, representing an increase of $95,458, or 55%, attributable to directors.stock grants to members of the Board and management.
The following is a summary of our non-cash compensation:
For the Nine Months Ended September 30 | ||||||||
2019 | 2018 | |||||||
Compensation upon vesting of stock options granted to employees | $ | - | $ | 15,767 | ||||
Compensation for vesting of restricted stock awards issued to the board of directors | 174,778 | 77,500 | ||||||
Total Non-Cash Compensation | $ | 174,778 | $ | 93,267 | ||||
For the Nine Months Ended | ||||||||
September 30, | September 30, | |||||||
2020 | 2019 | |||||||
Compensation for vesting of restricted stock awards issued to the Board of Directors | $ | 131,349 | $ | 174,778 | ||||
Compensation for vesting of restricted stock awards issued to management | 138,889 | - | ||||||
Total Non-Cash Compensation | $ | 270,238 | $ | 174,778 | ||||
Net Income
Net incomeResearch and development expenses for the nine months ended September 30, 2019 was $837,387,2020 were $883,752 compared to a loss of $2,718,764$591,572 for the same period in 2018,2019, representing an improvementincrease of $3,556,151,$292,180, or 130.8%49%. This improvement waschange is attributable to the substantialan increase in salesthe number of employees engaged in research and development activities as the Company focuses on the further development of existing and a higher gross profitnew products for the marine industry.
Other Income (Loss)
Net other income (loss) for the nine months endingended September 30, 2019,2020 was $(1,511,383) compared to $271,519 for the samecomparable period in 2018.2019, representing a decrease of $1,782,902. Included in the net other expenses for the nine months ended September 30, 2020 is the negative effect of $901,250 resulting from the fair value measurement of the prefunded warrants issued in May 2020. Additionally, losses on currency translations due to the negative impact of the USD/DKK exchange rate has impacted Net other income (loss) for the period resulting in an expense of $821,681 compared to income of $244,872 in the comparable period, representing a decrease of $1,066,553. Further, Net income (loss) is positively affected by $301,573 relating to the gain on modification of the earn-out agreement with the former owner of BS Plastic A/S, where the former owner has agreed to reduce the earn-out consideration from a total of DKK 6 million over three years to a fixed earn-out of DKK 4 million over a period of two years.
Net Income (Loss)
Net income (loss) for the nine months ended September 30, 2020 was $(6,133,731) compared to $837,387 for the comparable period in 2019, representing a decrease of $6,971,118.
This change was primarily attributable to the significant decrease in revenue and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment of $901,250 related to the prefunded warrant liability have widened the Net Loss for the period.
Liquidity and Capital Resources
In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who must work at our production facilities. Otherwise, most of our employees worked remotely during the shutdown. Since the beginning of May, businesses in Denmark began opening up as the effect of COVID-19 had largely been contained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increasing all over the world and tight restrictions are again being introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly at our production sites. All employees who can work from home are encouraged to do so.
We are unable to predict the full impact that COVID-19 will have on our long-term financial condition, the results of operations, liquidity and cash flows due to uncertainties. Our compliance with the measures implemented to avoid the spread of the virus have had a material adverse impact on our financial results for the second and third quarters of 2020. To the extent possible, we have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for at least the next 12 months from the issuance of this quarterly report. In addition, as a result of the reduced order intake and decreased manufacturing levels, our future gross profit will also likely be unfavorably impacted until such time that we are able to operate our manufacturing facilities at higher capacity levels as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products, especially if it results in a global recession. It could also lead to volatility in access to our products due to government actions impacting our ability to produce and ship products.
We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At the filing date, the Company had an available line of credit from the bank amounting to DKK20,000,000 ($3,000,000), which is used for a leasing arrangement and guarantees issued to customers for prepayments and for warranties after delivery.
Additionally, on May 21, 2020, the Company completed a private placement with certain accredited investors pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,662,125, including costs of $762,875 for placement fees, legal fees, auditor fees and other cost related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share, for gross proceeds of $2,575,000.
On September 30, 2020, we had cash of $14,492,549 and net working capital of $18,654,526, and at December 31, 2019, we had cash (including restricted cash) of $11,636,408$9,783,932 and net working capital of $19,779,324 and at December 31, 2018, we had cash of $3,776,111 and$17,155,126. On September 30, 2020, our net working capital of $6,753,593. At September 30, 2019, our working capitalhas increased by $13,025,731$1,499,400 compared to December 31, 2018 due2019 primarily related to the increase in cash as a registered public offeringresult of common stockthe private placement in the second quarter of 2019. Total current assets (excluding cash) were $18,427,192 and $7,597,095 at September 30, 2019 and at December 31, 2018, respectively, and total current liabilities (excluding finance debt and tax) were $9,571,535 and $4,605,254 at September 30, 2019 and at December 31, 2018, respectively. May 2020.
In connection with certain orders, we have to provide the customer with a working guarantee, or a prepayment guarantee or a security bond. For that purpose, we havemaintain a guarantee credit line of DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $1,500,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $13,800$14,878 at September 30, 2019)2020) with a bank, subject to certain base limitations. AsThis line of September 30, 2018, we had DKK 94,620 (approximately $14,690) in working guarantees against the credit line. The credit line is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by a restricted account at the bankcertain assets of LiqTech Systems.
On May 24, 2019, we issued 2,215,862 shares of common stock in a public offering for gross proceeds of approximately $16.2 million, which has improved our liquidity. We believe that our existing cashSystems such as receivables, inventory, and cash equivalents at September 30, 2019, along with cash generated from operations, will be sufficient to allow us to fund our current operating plan over the next 12 months. However, we may need additional funds to sustain and grow our business, and we may raise such funds from time to time through public or private sales of equity or debt securities. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially and adversely impact our financial condition and results of operations. Additional equity financing may be dilutive to holders of our common stock, and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate our business.equipment.
Cash Flows
Nine months ended September 30, 2019 compared2020 compared to nine months ended September 30, 20182019
Cash used inprovided (used) by operating activities is net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the nine months ended September 30, 20192020 was $4,518,651,$603,095, representing an increase of $680,445$3,915,556 compared to cash used inby operating activities of $3,838,206$4,518,651 for the nine months ended September 30, 2018.2019. The net result improvedchange in cash used by operating activities for the cash position by $3,556,151nine months ended September 30, 2020 compared to the same period last year. Further improvement in cash flow from account payables improved the cash position by $1,782,897 and accrued expenses by $2,096,824. Cash flow from account receivables had a negative impact on cash used of $3,283,087 related to the larger number of shipped orders in the September 2019. Further cash flow from other receivables increased by $2,546,1692019 was mainly due to reductions in Accounts receivable of $7,288,289 and Contract assets/liabilities (net) of $4,623,774, off-set by the larger numberdecrease in Net Income (Loss) of shipped orders, as this increase relates to the last payment$6,971,118 and a decrease in Accounts payable of most orders, which is normally invoiced when the commissioning has taken place. Deposits have increased by $2,138,406 due to prepayments made for the new furnaces in the production facility in Ballerup.$4,128,401.
CashNet cash used in investing activities was $3,229,674 for the nine months ended September 30, 2020 as compared to net cash used in investing activities of $1,641,605 for the nine months ended September 30, 2019, representing an increase of $1,495,621, as compared to cash used in investing activities of $145,984 for the nine months ended September 30, 2018. The$1,588,069. This increase in cash used in investing activities was mainly due primarily to the acquisitionpurchase of property and equipment related to the installation of new furnaces in Ballerup to increase production capacity. Further, the Company has paid the first earn-out installment ($301,573) related to the purchase of LiqTech Plastics (former known as BS Plastic AS that included a cash payment of $1,154,902.Plastic).
Cash provided by financing activities was $7,229,505 for the nine months ended September 30, 2020 as compared to net cash provided by financing activities of $14,720,965 for the nine months ended September 30, 2019, as2019. This change of $7,491,460 was mainly due to net cash proceeds of $7,237,125 related to the capital raise in May 2020 compared to cash provided by financing activitiesnet proceeds of $5,913,204 for$14,601,554 from the nine months ended September 30, 2018. The cash provided by financing activities is mainly related to a public offering that raised $16,065,000 less offering costs of $1,463,446 during the nine months ended September 30,capital raise in May 2019.
Off Balance Sheet Arrangements
As of September 30, 2019,2020, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.
Significant Accounting Policies and Critical Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:
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● | the assessment of allowance for product warranties, which impacts gross profit; | |
● | the assessment of collectability of accounts receivable, which impacts operating expenses when and if we record bad debt or adjust the allowance for doubtful accounts; | |
● | the assessment of recoverability of long-lived assets, which impacts gross | |
● | the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; | |
● | the valuation of inventory, which impacts gross | |
● | the recognition and measurement of loss contingencies, which impact gross | |
Recently Enacted Accounting Standards
For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 1: Recently Enacted Accounting Standards” in the accompanying Financial Statements.
Subsequent Events
The Company’s management reviewed material events through November 14, 2019 and there were no material subsequent events to report.9, 2020.
On November 3, 2020, the Company amended its Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 25,000,000 shares to 100,000,000 shares following approval by the Company’s shareholders at the annual meeting held on October 29, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this AnnualQuarterly Report. We have excluded the acquired company LiqTech Plastics (formerly known as BS Plastic) from the assessment of internal controls over financial reporting as of September 30, 2020 due to the limited time that the Company has been part of the LiqTech Group and an immaterial impact on the consolidated financial statements. A weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or override of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives
Based on thisupon that evaluation, Managementour Chief Executive Officer and our Chief Financial Officer concluded that due to the limited number of employees in the finance department, our disclosure controls and procedures as of September 30, 2020 were not effective as of such datethe period covered by this Quarterly Report due to material weaknesses that were identified.in internal controls over financial reporting. For more information on material weaknesses identified by management, please reference our Form 10-K filed on March 30, 2020 for the year ended December 31, 2019.
Changes in Internal Control over Financial Reporting
The implementation of the new ERP-system from the beginning of 2020 together with implementation of additional internal control procedures, has strengthened the Company´s internal control environment. From the report received from the Company´s external auditor as a result of the audit of 2019, we have focused on improving controls to address each reported deficiency; however, the impact of COVID-19 restrictions has restricted the pace of the progress significantly.
Management's Remediation Initiatives
In response to the identified material weaknesses, our management, with oversight from the Company’s Audit Committee, has been and will continue to dedicate necessary resources to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. As an example of such remediation, the Company in 2019 we have hired additional qualified employees into the finance department, and we plan to enhance our control environmentcontinue to remedy this lack of effectivenesswork on remediating the material weaknesses during 20192020 by improving competencies and 2020 in connection with implementing procedures to minimize the identified weaknesses.processes. Further, a plannedan investment in a new ERP-systemERP system has been made along with other supporting IT programs to support the controls and processes of the Company, should ensure that identified weaknesses will be detected on a timely basisand these investments are an important part of the remediation of the material weaknesses. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to the financial reporting process to ensure properthe effective design and reliable financial reporting.operation of process-level controls.
A material weakness is a control deficiency, or combinationWhile management believes that the steps that we have taken and plan to take will improve the overall system of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statementsand will not be prevented or detected on a timely basis. For more information onremediate identified material weaknesses, identified by Management, please see our annual report on Form 10-Kthe material weaknesses cannot be considered remediated until the applicable relevant controls operate for the year ended December 31, 2018.a sufficient period of time.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Remediation Initiatives
Management has been actively developing a remediation plan and been implementing new controls and processes to address the aforementioned deficiencies. Upon identifying the material weakness in of our internal controls, we have taken actions to strengthen our internal control structure.
Management continues to meet with key managers and control owners to evaluate the effectiveness of internal controls and to ensure implementation of remediation initiatives.
Limitations on the Effectiveness of Internal Controls
An internal control system, no matter how well-conceivedwell conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by Managementmanagement override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
None.
NotWe are unable to accuratelypredict the full impact of COVID-19 on our business, and the COVID-19 pandemic may adversely impact our business as a result of the pandemic’s global economic impact.
In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increasing all over the world, and tightening restrictions are again introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly on the production sites, and all employees who can work from home are encouraged to do so.
We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, results of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second and third quarters of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. In addition, as a “smaller reporting company.” result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products, especially if it results in a global recession. It could also lead to volatility in access to our products due to government actions impacting our ability to produce and ship products.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
4.1 | Filed herewith | |
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101. INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | Filed herewith |
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101. CAL | Inline XBRL Taxonomy Extension Calculation Link base Document | Filed herewith |
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101. DEF | Inline XBRL Taxonomy Extension Definition Link base Document | Filed herewith |
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101. LAB | Inline XBRL Taxonomy Label Link base Document | Filed herewith |
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101. PRE | Inline XBRL Extension Presentation Link base Document | Filed herewith |
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101. SCH | Inline XBRL Taxonomy Extension Scheme Document | Filed herewith |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LiqTech International, Inc. |
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Dated: November | /s/ Sune Mathiesen |
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| Sune Mathiesen, Chief Executive Officer |
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Dated: November | /s/ Claus Toftegaard | |
Claus Toftegaard, Chief Financial Officer |
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